How credit crunch had affected mortgage rates in 2007-2009
Credit crunch implies a period of time when it is difficult for borrowers to take out loans especially at favorable terms and conditions. Scared of loan defaults, the lenders charge high interest rates for offering loans. Read on to know how the credit crunch had affected mortgage rates during 2007-2009.
Credit crunch – The reasons behind it
Credit crunch is said to occur when it becomes difficult to obtain credit. The lenders stop lending out of fear that the borrowers will not be able to pay back the loan within the stipulated time. In times of economic recession, the lenders offer loans to borrowers with high credit score and also tend to charge higher rates in order to minimize the losses in case of default.
One of the primary reasons behind the credit crunch (2007-2009) was subprime mortgage meltdown. Subprime mortgages were at its peak in the year 2006. Lenders used to offer bad such home loans to borrowers with bad credit and used to charge high mortgage rates in order to get more return for offering such high risk loans.
Though the borrowers could get these loans with limited documentation and short employment history, yet they started experiencing problems in paying back the mortgages. As a result, the lenders had to foreclose such properties in order to get back the money they’ve invested on the properties. However, the lenders could not get back the required amount as the property prices also declined. Moreover, the borrowers also could not refinance their mortgages as the housing boom came to an end and the lenders failed to build up enough home equity.
All these factors resulted into credit crunch that started in 2007 and continued till 2009.
Credit crunch – How it affected mortgage rates
The following section gives a brief overview of how mortgage rates changed due to credit crunch and economic recession during the period 2007-2009.
- In the year 2007
The interest rates on home loans jumped to a record high in the middle of the year 2007. The average interest rate on 30-year FRMs (Fixed Rate Mortgages) was about 6.53% whereas the rates on 15-year FRMs were around 6.22%. Interest rates on 5-year ARMs (Adjustable Rate Mortgages) and 1-year ARMs were about 6.24% and 5.65% respectively. However, at the end of 2007, the rates fell down to around 6.03% for 15-year FRMs.
- In the year 2008
The mortgage rates on 15-year FRMs increased again at the end of 2008. During that time, the average rate on 15-year FRMs was about 6.14% whereas the interest rates on 30-year fixed rate jumbo mortgages increased to around 7.65%. The rates on 1-year ARMs were about 6.04% but 5/1 ARMs increased to around 6.49%.
- In the year 2009
In the middle of the year 2009, the average rate on 30-year FRMs dropped to 5.2% and 15-year FRMs to 4.69%. As a result, a number of borrowers refinanced their mortgages in order to take the advantage of comparatively low mortgage rates.
As per industry experts, the economic recession and credit crunch had come to an end in the year 2009. However, the housing market has not recovered properly; but, as far as mortgage industry is concerned, the rates on 30-year FRMs will vary in between 4.9 – 5.08% in the year 2010, which will hopefully help the housing market to recover in the forthcoming days.
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