How the Recession Has Affected the Subprime Mortgage Delinquency Rate

The subprime mortgage delinquency rate has gone up as a result of chain reaction events in the global credit crisis. Today, the term "subprime mortgage" often indicates bad lending practices or highly risky debts. When these loans were first issued, they were considered to be viable options. Many may have continued to be a good choice for borrowers who did not qualify for traditional mortgages had the industry not collapsed. Now, even smart borrowers who took reasonable subprime loans may face delinquency.

Bad Lending Practices

Even though not all subprime loans were issued in a predatory manner, many were. Add to this the fact that the financial markets were engaging in trades against these mortgages, called mortgage based securities, and you have a high potential for disaster. As the few individuals who could not afford their bad loans began to default, the financial market was turned on to the fact many of the mortgages it owned as assets were actually more like liabilities. Very quickly, a panic occurred in the mortgage market that harmed those with the least financial resources in the greatest extent.

Rate Increases

The biggest impact of the mortgage crisis for many homeowners was skyrocketing mortgage rates. Any borrower who had a variable rate mortgage, even if the mortgage was not subprime, could have been subject to large increases in interest rates as an immediate response to the credit collapse. Lenders recoiled quickly from these risky investments, throwing borrowers into large monthly payments they were unprepared for. Other rates, such as credit card rates, also took a jump.

Job Losses

In an effort to pay off all of these debts at the higher rates, many Americans exhausted emergency savings. This would have been sustainable if they could keep their consistent income stream. However, in a very rapid succession, other industries that were tied to the housing market began to collapse. Few analysts could have predicted how much the remainder of the economy was propped up by the housing market and home equity debt. The automobile industry, luxury good industry, thriving consumer electronics market and even retail clothing outlets began to see sharp declines in spending. People were laid off in record numbers. In a consumer based economy, many jobs are tied to these "purchase and consumption" jobs. All of a sudden, an individual in a home with high mortgage payments and no emergency fund finds himself or herself out of a job.

Mortgage Delinquency

Mortgage delinquency is rarely intentional. Under these circumstances, though, it is clear how delinquency can be the result of one event after another, eventually resulting in a missed payment. When the borrower cannot catch up with the cycle of downturns, one missed payment gives way to another. Eventually, delinquency occurred in rapid numbers. The most exposed to liabilities in this highly risky market were those with no control over how high their mortgage rates could climb. Subprime loans lead the way in delinquencies and defaults. Following the market crash, subprime became a dirty word in the mortgage industry because of the way these loans failed.