The worst financial crash since 1929, which brought about the Lehman Brothers collapse and put millions of people out of work, seems far behind us. The US stock market is at record highs, unemployment is lower than ever, and investment is through the roof.
But what about the chief cause of the 2008 crash: subprime mortgages? These cheap mortgages aimed at people with bad credit have largely been accepted as a major cause of the US mortgage crisis and subsequent collapse. As such, you would think these types of dodgy loans would be a thing of the past.
Here’s the thing though. They’re back. Although they come with a different name and appearance, the subprime mortgage is back with a vengeance and they are more popular than ever.
Here’s the current state of play and what it might mean for the future of the US economy.
Subprime Mortgages Explained
If you’re wondering what subprime mortgages are, here’s a quick explainer. They’re essentially housing loans given to people who don’t have the credit to qualify for a mortgage.
Prior to 2008, they were given out to millions of people with no credit who were clearly unable to ever pay them back. The result was a huge debt bubble that eventually popped, causing the financial crash.
Why They’re Back
In the wake of the crash, tough legislation was brought in to stop predatory lenders from issuing subprime mortgages. However, since then, regulations have loosened and shady lenders have bounced back.
There are a growing number of companies now offering housing loans worth millions to people with “less than perfect credit”, under the new guise of “nonprime mortgages”.
These are proving to be just as popular as the subprime mortgages of the past, meaning there could be potentially devastating repercussions for the economy.
What Investors Should Know
If you’re an investor, especially one with their toes in mutual funds, this will obviously concern you. Mutual funds often deal in real estate and debt holdings, and a widespread crash could easily wipe you out.
Fortunately, mutual funds have tended to stay away from these kinds of loans for now, as investors are still wary of the mistakes of the last decade.
Make sure to keep up to date with all of the latest investment trends via money market investments, so you can avoid being burned in the future.
What It Means
Understandably, the news doesn’t look good. The last time this happened, millions of people defaulted on their mortgages and were unable to refinance their homes since their house was worth less than the high-interest mortgage.
There are safeguards in place meant to protect the economy and the American people from another Great Recession, but nothing is guaranteed.
One thing that’s certain is that if another major banking collapse does happen, the political will to bail them out like in ’08 will be non-existent. The results could be truly devastating.
Whether you’re a savvy investor or wanting to learn more about the rise of subprime mortgages, it pays to be informed. For all of the latest trends and developments in the US economy, make sure to follow our US Section today.