High-Risk Mortgages

Guide Note:

High-risk mortgages have facilitated those with low credit scores to become homeowners. Subprime loans can be of the high risk variety. Subprime loans are typically mortgages to borrowers with credit scores of 620 or below. With a low credit score, lenders typically must charge a higher interest rate. Interest rates charged on a subprime loans are typically adjustable-rate mortgages (ARMs). A garden-variety ARM has a low interest rate period for the first two or three years. However, after the introductory period, interest rates go up resulting in higher monthly mortgage payments.

Fast Facts:

1. Federal Housing Administration (FHA) insures over 34 million home mortgages¹
2. June 2008 FHA expects to lose $4.6 billion due to high default rates on home loans²
3. The FHA expects to help 500,000 people refinance their home mortgages in 2008

• "Looking forward, the Federal Reserve, other regulators, and the Congress must evaluate what we have learned from the recent episode and decide what additional regulation or oversight may be needed to prevent a recurrence"— Bernanke, at At the Federal Reserve Bank of Chicago
• "I believe that, in the long run, markets are better than regulators at allocating credit."— Bernanke, at At the Federal Reserve Bank of Chicago