Subprime Mortgages : The Subprime Mortgage Crisis

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 bursting of the housing bubble, known more colloquially as the 2008 mortgage crisis, was preceded by a series of ill-fated circumstances that culminated in what has been considered to be the worst financial downfall since the Great Depression. After experiencing a near-unprecedented increase in housing prices from January 2002 until mid-2006, a phenomenon that was steadily fed by unregulated mortgage practices, the market steadily declined and the prior housing boom subsided as well. When housing prices dropped to about 25 percent below the peak level achieved in 2006 toward the close of 2008, liquidity and capital disappeared from the market.

The housing crisis of the late 2000s rocked the economy and changed the landscape of the real estate business for years to come. Decades of people purchasing houses unfordable houses and properties with lenient loans policies led to a collective housing bubble. When the banking system faltered and the economy wilted, interest rates were raised, mortgages increased, and people lost their jobs amidst the chaos. This all culminated in tens of thousands of American losing their houses to foreclosures and short sales, as they could no longer afford the mortgage payments on their homes. The United States entered a recession and homeownership no longer appeared to be a feasible goal as many questioned whether the country could continue to support a middle-class. Former home owners became renters and in some cases homeless as the American Dream was delayed with no foreseeable return. While the future of the economy looked bleak, conditions gradually improved. American citizens regained their jobs, the United States government bailed out the banking industry, and regulations were put in place to deter such events as the mortgage crash from ever taking place again. The path to homeowner ship has been forever altered, as loans in general are now more difficult to acquire and can be accompanied by a substantial down payment.

Since mid 1990s, the subprime mortgage market has grown rapidly experiencing a phenomenal 23% compound annual growth rate to 2006. The total subprime loan originations increased from $65 billion in 1995 to $613 billion in 2006. The subprime sector has become a significant sub-sector of the total residential market accounting for 21% of all residential mortgage originations in 2006. Similarly, by year-end 2006, total outstanding balance of subprime loans grew to $1.2 trillion, approximately 12.6% of all outstanding mortgage debt.

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

Approximately five million homes have been foreclosed since 2007 which, along with an untold amount of short sales, have caused an estimated $1 trillion in lost wealth in the United States. This crisis affected our minority populations and their communities to a larger extent with estimations of 17-20 out of every 1000 minority homeowners suffering foreclosure versus only 10 out of every 1000 Caucasian homeowners. This was due to targeting by the subprime mortgage companies specifically targeting African-American, Hispanic and Asian buyers with risky mortgages even when they could have qualified for prime loans. Also affected were many who lost their homes due to income loss due to the Great Recession which had its beginning in the subprime mortgage crisis. Many of those that have lost their homes during this crisis are interested in being homeowners again and this essay will cover some possible ways for all of these boomerang buyers to enter into the housing market again.

Many factors such as the U.S. Sub-prime mortgage crisis, credit crunch, decline in investments, higher unemployment rates, terror attacks, and the housing bubble caused the great recession of 2007 to 2009. The resulting loss of wealth led to severe cutbacks in consumer spending. This loss, combined with the craziness of the financial market led to the collapse and business investments. As consumer spending and business investments went down massive job loss followed. The largest indicator of economic activity is the real gross domestic indicator (GDP). The recession had a loss of business and consumer confidence. Spending declined and millions of jobs were lost. This resulted in a downward shift in the GDP, and a severe increase in unemployment

With encouragement from politically influential persons to increase home ownership rates and the optimism that followed the yields on government bonds, lenders and investors sought assets with even higher-yields. The problem, however, was the lack of credit-worthy borrowers. To remedy this, lenders sought out those who would not ordinarily meet typical credit standards within the sub-prime (and non-standard loans) segment of the housing market. These subprime borrowers were considered profitable and were viewed as the solution to the lenders ' search for higher yields. This, of course, was a much riskier tactic and led banks to hide their questionable transactions. The actions on behalf of the banks, along with their reckless behavior, resulted in the creation of the subprime US housing market and ultimately led to the deterioration of the economy.

The U.S. subprime mortgage crisis was a nationwide catastrophe that resulted in the increase of the default and foreclosure of home loans, and consequent decrease in the value of mortgage-backed securities. The mortgage crash was a result of non-bank originators being insufficiently regulated and engaging in excessive risk-taking behavior and questionable lending practices. However, the leading causes for the subprime mortgage extend further than flawed lending decisions. The subprime mortgage crisis would not have occurred had it not been for a series of fundamentally flawed government policies (Allen, 2015).

First, the subprime mortgage was a major reason for the financial meltdown. Initially, subprime mortgages were designed to assist borrowers with a low credit score and fall into the low-income bracket. However, lenders starting utilizing this loan type for all borrowers regardless of economic status. The ethical issue observed was a lack of trustworthiness. Lenders did not disclose all of the risk involved with this loan type. They only promoted the benefits of profits and lower monthly payments. The slow down of the housing market quickly identified the pitfalls of

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

Housing prices in the United States rose steadily after the World War II. Although some research indicated that the financial crisis started in the US housing market, the main cause of the financial crisis between 2007 and 2009 was actually the combination of housing bubble and credit boom. The banks created so much loan that pushed the housing price to the peak. As the bank lend out a huge amount of money, the level of individual debt also rose along with the housing price. Since the debt rose faster than people’s income, people were unable to repay their loan and bank found themselves were in danger. As this showed a signal for people, people withdrew money from the banks they considered as “safe” before, and increased the “haircuts” on repos and difficulties experienced by commercial paper issuers. This caused the short term funding market in the shadow banking system appeared a

The credit crisis is a worldwide financial crisis that includes terms like sub-prime mortgages, collateral debt obligations (CDOs), Frozen Credit Markets and the Credit Default Swaps. Everyone has been effected been affected in the credit crisis in a way. The credit crisis brings home owners and investors together. Home owners represent mortgages and the investors represent money which consists of large institutions such as mutual funds and also pension funds. The home owners and investors are brought together by the financial system- a bunch of banks (Wall Street) and the banks would earn commission. A few years ago, investors had a huge pile of money and they bought treasury

In September and October 2008, the US suffered a severe financial dislocation that saw a number of large financial institutions collapse. Although this shock was of particular note, it is best understood as the culmination of a credit crunch that had begun in the summer of 2006 and continued into 2007. The US housing market is seen by many as the root cause of the financial crisis. Since the late 1990s, house prices grew rapidly in response to a number of contributing factors including persistently low interest rates, over-generous lending and speculation. The bursting of the housing bubble, in addition to simultaneous crashes in other asset bubbles, triggered the credit crisis.

There were many culprits in the subprime loan debacle in the United States starting somewhere around the middle of 2006. Gilbert (2011) state many levels of contributors participated in this mortgage lending crisis. Gilbert (2011) portends some of these included loan applicants, mortgage brokers, lenders, individual mortgage packagers, agencies that rate mortgages, investment brokers, and advisers, and purchasers of the collateralized mortgage obligations (Gilbert, 2011).