Transcripts

"Money File"-Secret Sub-Prime Mortgages

SUSIE GHARIB: In the money file tonight, could you have a sub-prime mortgage loan and not know it? It's quite possible. Here's Chuck Jaffe, senior columnist at "Marketwatch" to explain.

CHUCK JAFFE, SENIOR COLUMNIST, MARKETWATCH: Recent headlines have been filled with bad news about the sub-prime lending business. In plain English, sup-prime lending involves loans made to people who are bad credit risks. Now it should surprise no one that when you make loans to people with lousy credit histories, or you create some crappy financial product allowing a buyer to stretch beyond their income to get a home, you're going to see defaults, especially when there's a shift in interest rates. National foreclosure statistics bear that out.

But what's surprising is that the mortgage business appears to be making loans to consumers who barely understand the products they're getting. A national poll released last week by bankrate.com showed that one-third of the nation's homeowners don't actually know the type of mortgage they have. They couldn't say if it was a fixed-rate or an adjustable, a balloon or an interest-only mortgage. Their ignorance is not bliss. Coupled with the fact that 28 percent of respondents worry about how they will afford their house payments, it's a recipe for disaster.

With interest rates stabilizing, it's a good time to assess whether you should change your mortgage, but you can't shop around for something better when you don't know what you've got now. So ignore the headlines about sub-prime lenders and consider whether you are actually a sub- prime borrower. It's not just about your credit score. It's about your knowledge o your biggest financial obligation. What you don't know can hurt you. The proof is in those rising foreclosure numbers. I'm Chuck Jaffe.