ForsaleThe stock market has been taking a beating lately, and many experts are blaming sub-prime mortgages.

These risky mortgages — which typically have less-than-favorable terms and are often given to home-buyers who have credit problems — were all the rage a few years ago when home prices were rising rapidly. According to the Wall Street Journal, “delinquencies stayed low at first because U.S. home prices were rising at a rapid clip, and borrowers who fell behind on payments were able to simply refinance their mortgages.” But as home prices have dropped and the housing bubble threatens to burst, more and more borrowers are unable to keep up and are defaulting on their loans, and the banks that gave them the money have been left holding the bag.

That, in turn, has left investors nervous. According to this National Public Radio report, overseas banks that have invested in “U.S. mortgage-backed securities” are experiencing big losses, and that is sending stock prices plunging throughout the world. Meanwhile, the SEC is examining exactly how vulnerable U.S. banks are to home-loan defaults.

How’d we get into this mess in the first place? Isn’t it inherently risky to loan money to people with poor credit? Don’t people with poor credit realize how dangerous these high-risk loans are? Perhaps. But according to this article, it might not matter. Author Andrew Leonard says the human brain may be hard-wired to ignore logic and pursue quick fixes instead.

That’s an interesting theory. But for the financially literate, logic is still king. With that in mind, the MACPA offers the following guidance on applying for mortgages and repairing poor credit ratings. These articles were prepared by the California Society of CPAs and are reprinted here with permission.

Your browser is out-of-date!

Update your browser to view this website correctly. Update my browser now