Explain the Process by Which Mortgage Defaults Occurred in the Mid-2000s

Question

Examlex · Accepted Answer

The Answer is Teaser rates had already tempted many homeowners to take on the burden of a mortgage but without necessarily fully understanding the financial commitments they were making. After the teaser rate period finished, the mortgages had to be restructured based on a new rate of interest. The new rate of interest not only reflected the need to claw back some of the interest not paid in the initial teaser rate period but also the fact that these borrowers were at higher risk. As mortgage rates rose, borrowers found it increasingly difficult to meet their monthly payments. In some cases, the difference between initial monthly payments and restructured payments based on new interest rates was significant; many homeowners found their monthly mortgage payments more than doubling. The sub-prime market consisted of people least able to cope with such changes and in addition those who had taken out sub-prime mortgages for second homes and the buy-to-let market also found themselves stretched.

Explain the Process by Which Mortgage Defaults Occurred in the Mid-2000s

Definitions: