Speaker 1: Welcome to brain Stuff from how stuffworks dot com where
Speaker 1: smart Happens. Hi, I'm Marshall Brains. They are all over
Speaker 1: the news right now and they are called subprime mortgages.
Speaker 1: But what exactly is a subprime mortgage? The word subprime
Speaker 1: refers to a type of borrower. A person who has
Speaker 1: been categorized as subprime is someone who has an imperfect
Speaker 1: credit history. For example, the person may have had a
Speaker 1: problem with missed payments or a prior foreclosure or a bankruptcy.
Speaker 1: This leads to a low credit score, generally below six thirty.
Speaker 1: In other words, this type of borrower is considered to
Speaker 1: be at a higher risk for defaulting on a loan.
Speaker 1: So a subprime mortgage is a mortgage that's given to
Speaker 1: a subprime borrower. The general idea in a subprime mortgage
Speaker 1: is that because the person is a higher risk, the
Speaker 1: person will be charged a higher interest rate. For example,
Speaker 1: the person might be given an adjustable rate mortgage that
Speaker 1: has a low rate initially and then adjust much higher.
Speaker 1: The thing that caused the subprime mortgage crisis is the
Speaker 1: fact that borrowers started a default on their loans at
Speaker 1: a much higher rate than expected. With so many houses,
Speaker 1: flooding the foreclosure market. It will have a big negative
Speaker 1: effect on banks and perhaps the housing market as a whole.
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