Sub Prime Mortgage Crisis : Overview

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

The responsibilities of the mortgage brokers to the borrowers, lenders, and investors were to promote the subprime mortgages to these groups of people in order for them to take out a loan. Although they did fulfill their responsibilities of promoting and having people sign up for it, they mishandled on how people should be granted for a mortgage loan. These brokers were to desperate about earning huge amount of money due to the expanding market that they ignored the proper precaution that they should have taken when they

The financial crisis that occurred in 2007-2008 is narrowly related to what happened with the housing market and the foreclosure crisis. In 2006, the housing market peaked due to newly available loans such as interest adjustable loans, interest only loans, and zero down loans for people with low-income jobs. Housing prices were increasing radically and new homeowners were taking out mortgages that they would be unable to pay for in the future, all in order to be able to afford homes with such steep real estate value. By 2007, things began to go downhill. Interest rates had begun to rise steeply, mortgage companies had to file bankruptcy, and banks across the country required bailout funds from the U.S. Treasury in an effort to recover

The financial crisis in America had spread to Europe. Banks in the UK bear the greatest impact from the credit crisis sub-prime housing loans in the U.S. For example, Northern Rock Bank had a bad debt account of up to 191.6 billion U.S. dollars in July 2008 and the Bank of England had to pump 27 billion pounds to rescue Northern Rock Bank. At the end of September 2008, there were some other big banks in Europe such as Dexia and Hypo Real Estate falling in the crisis and these banks were rescured by the governements throught financial bailout. (Alexander, 2008)

The most commonly known sub-prime finance crisis came into illumination when a sudden rise in home foreclosures in 2006 twirled seemingly out of control in 2007, triggering a nationwide economic crisis that went worldwide within the year. The greatest responsibility is pointed at the lenders who created such problems. It was the lenders who, at the end of the day, lend finances to citizens with poor credit and a high risk of failure to pay. When the Feds inundated the markets with growing capital

In 2008 the United States economy faced it most serious economic downturn since the great depression. This crisis began in 2006 when the subprime mortgage market showed an increase in mortgage defaults. This would lead to the decline of the U.S. housing market after a decade of high growth. The problems in the mortgage market where able to spread to other sectors of the economy especially in financial markets because of Collateralized Mortgage Obligations or CMOs. CMOs where mortgage backed securities that where given out by investment banks and where not regulated by the government. These securities fell as did mortgages due to increasing default rates. Because of CMOs companies bought Credit Default swaps or CDSs. These CDSs where nominally

The main reason for the crisis was a boom and bust in the housing markets at the same time. Home values rose rapidly during the beginning of the 2000’s. Many homeowners used their homes and other assets to withdraw equity to produce add-ons to the house, such as kitchens, decks, or patios. Once the value of the houses went down, they could not pay off this extra debt. Homes were beginning to be valued at less than what the homeowners owed on them. This period was powered by leverage, securitization, and structured finance. Housing was a hot commodity at that time, and Americans were taking out hefty loans in order to pay for them. There was a rise in self-employment at that time, and borrowing money was very relevant at that time. Adjustable rate mortgages, which provided initial interest rates and low monthly payments were the most common form of loans between 2004 and 2008. The banks were not careful in their securitization of loans, and a lot of loans defaulted. The defaults mainly revolved around the failing of the housing market. At the time, there was low requirements for down payments on houses. Lenders were only asking for approximately 3%, today it is up around 10% (Golub). This allowed for more and more people to put a down payment on a house, who would not be capable of paying the banks back. During this time, there was a dramatic increase in sub-prime lending, which means that the people borrowing the money had lowering credit

There was misbelief over future market rates and home values by those looking to buy or sell their home. Banks were lending money irresponsibility, which allowed more people the ability to purchase homes who normally could not afford to enter the market. This increased demand in the market for homes, bidding up the overall price of homes. The value of these homes, however, remained the same. In addition to purchasing homes beyond the means of the consumer, existing home owners applied for equity on the false notion that their homes had increased in value. With far more money in the hand of the consumer, families began splurging and purchasing. To offset this increased demand for goods, firms raised prices. When the economy crashed, homeowners and those who had borrowed or took out equity against their homes were left with a massive amount to pay off. From the raised prices, there was inflation which burdened consumers even more. Instantly, households were left with massive amounts of debt that banks were demanding repayment for. When borrowers’ jobs could no longer support the payments for these debts, many households filed for bankruptcy. Many banks couldn’t cover their costs because payments were not being made, which led to the shutdown and take-over of many well-known banks overnight. This also impacted the auto industry, to some degree. Because auto manufactures rely on consumers purchasing the current year’s car model, auto manufacturers could not cover their costs and ultimately had to lay-off many workers, many of which also had massive amounts of debt to pay off. The economic crisis was not caused by any one entity, rather it was a combined problem of uncalculated risks, an overly optimistic market, household greed, and poor regulation of banks. The only solution to this problem is putting more regulation on banks (increase reserve

During the mortgage meltdown of the 2000s, I lived in an area of Metro Detroit know for their financial instability. Our local high school was millions of dollars in debt, and it was not unlikely to see many houses in my neighborhood go into foreclosure throughout the year. It was truly an epidemic that was taking hold of every family in the community, no matter the strength of their financial background. I also saw how models like this could be found across the entire country, and how it was becoming a destructive environment to be a part of. This environment was unsettling to me as a child, and was the fundamental reason that I have consciously formed structured financial habits as I ease into adult life. I refused to assimilate to a culture that showed debt, such as student loans or mortgages, as the only way to live in society. In this, I am driven to graduate college debt-free; this task will be far from easy, but with determination and consistency, I will succeed. I know that what the nation needs to pull itself into celebrated economic security is through embedded financial literacy and complete cultural transformation.

The housing market crash, which broke out in the United States in 2007, was caused by high risk subprime mortgages. The subprime mortgage crisis resulted in a sudden reduction in money and credit availability from banks and other lending institutions, which was referred to as a “credit crunch.” The “credit crunch” and its effect spread across the United States and further on to other countries across the world. The “credit crunch” caused a collapse in the housing markets, stock markets and major financial institutions across the globe.

Collateralized debt obligations (CDOs) refers to a kind of innovative derivative securities product which simply bundling mortgage debt, bonds, loans and other assets together and then rearranging these assets into different tranches with different credit ratings, interest rate payments, risks, and priority of repayment to meet the needs of different investors. As borrowers began to default, investors in the inferior tranche of the CDOs took the first hit, so the owner of this tranche of CDOs may be riskier. In order to compensate for the higher risk, the subordinate tranche receives higher rate of return while the superior tranche receives lower rate but still nice return. To make the top even safer, the banks ensured it small fee called the credit default swap (CDS). The banks do all of the works so that creating rating agencies will stamp the top tranche since as a safe, triple A rated

The impacts in USA were Real gross domestic product (GDP) began contracting, Rise in Unemployment rate, Housing investments fell, Housing prices fell, Stock Markets prices fell, Net worth of US housings and non-profit organizations fell, rise in the national debt percentage, decline in manufacturing and trade.

One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage

The new lackadaisical lending requirements and low interest rates drove housing prices higher, which only made the mortgage backed securities and CDOs seem like an even better investment. Now consider the housing market which had become a housing bubble, which had now burst, and now people could not pay for their incredibly expensive houses or keep up with their ballooning mortgage payments. Borrowers started defaulting, which put more houses back on the market for sale. But there were not any buyers. Supply was up, demand was down, and home prices started collapsing. As prices fell, some borrowers suddenly had a mortgage for way more than their home was currently worth and some stopped paying. That led to more defaults, pushing prices down further. As this was happening, the big financial institutions stopped buying sub-prime mortgages and sub-prime lenders were getting stuck with bad loans. By 2007, some big lenders had declared bankruptcy. The problems spread to the big investors, who had poured money into the mortgage backed securities and CDOs. They started losing money on their investments. All these of these financial instruments resulted in an incredibly complicated web of assets, liabilities, and risks. So that when things went bad, they went bad for the entire financial system. Some major financial players declared bankruptcy and others were forced into mergers, or needed

Another component of fraud crimes is reliance. For the government to prevail on fraud charges, it has to establish reasonable reliance on the alleged misrepresentations or omissions. Most financial crisis related investigations focused on mortgage backed securities that banks sold consisted of subprime mortgages that are doomed to be defaulted. The misrepresentation argument goes that banks failed to disclose the low quality of the mortgages and substantial risks of default that are associated with them. However, banks can conveniently raise the defense that the securities are sold to sophisticated investors, such as pension funds and mutual funds, who could have known what was going on in the subprime mortgage market and