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Are There Any Benefits to Those Risky Subprime Mortgages?
Subprime mortgages have received a lot of attention, and most of the securitization news in this area has to do with the risks that these investments involve. These mortgage loans are considered very risky to the investor, the lender, and the borrower. The rates of default on these securities are high, and with a bad economy these risks go much higher. That does not mean that subprime mortgages do not have any benefits though. One of the most attractive benefits for investors is that the high risk translates into higher returns, as long as a default does not occur. The requirements for mortgages which are subprime are not as strict as the requirements for those considered prime.
Subprime mortgages are marketed to consumers who have poor credit scores or have had payment and credit problems in the past. These are consumers that would probably never qualify for a typical mortgage based on the requirements, and in exchange for the loan will pay a higher percentage as a result. Loan securitization allows investors to provide capital, and as a result earn a higher than normal return as long as the mortgage payments are being met. Careful evaluation should be done before making any investment in this sector, because substantial losses of investment capital can occur if a default happens. Subprime mortgages may be sliced up, and packaged as interest only and principal only sections or investment, or they can be kept whole. These mortgages do offer some benefits to investors, but the risks are extremely high and this factor must be considered as well.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.