How The USbprime 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 Great Recession of 2007-2009 was one of the most economically disastrous events in American history. The housing market took a significant downturn during this period. People were not cautious when it came to their money and loans. Larger loans were given out to people, even to those with bad credit and low incomes. These large loans caused many homes to go through foreclosure since people were unable to pay off their mortgage debts. These debts were created by banks increasing the interest rates on the loans significantly in a short period. In 2008, foreclosures were up by eighty-two percent. This increase is significant because the previous percentage of foreclosures was at fifty-one percent from 2007. Unemployment skyrocketed, and people

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 U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play

During the early 2000 's, the United States housing market experienced growth at an unprecedented rate, leading to historical highs in home ownership. This surge in home buying was the result of multiple illusory financial circumstances which reduced the apparent risk of both lending and receiving loans. However, in 2007, when the upward trend in home values could no longer continue and began to reverse itself, homeowners found themselves owing more than the value of their properties, a trend which lent itself to increased defaults and foreclosures, further reducing the value of homes in a vicious, self-perpetuating cycle. The 2008 crash of the near-$7-billion housing industry dragged down the entire U.S. economy, and by extension, the global economy, with it, therefore having a large part in triggering the global recession of 2008-2012.

The financial crisis emerged because of an excessive deregulation of business operation of financial institutions and of abusing the securitization mechanism in the absence of clearly defined rules to regulate this area in the American mortgage market (Krstić, Jemović, & Radojičić, 2013). Deregulation gives larger banks the opportunity to loosen underwriting lender guidelines and generate increase opportunity for homeownership (Kroszner & Strahan, 2013). After deregulation, banks utilized many versions of mortgage loans. Mortgage loans such as subprime and Alternative-A paper loans became available for borrowers challenged to find mortgage lenders before deregulation (Elbarouki, 2016; Palmer, 2015). The housing market has been severely affected by fluctuating interest rates and the requirement of large down payment (Follain, & Giertz, 2013). The subprime lending crisis has taken a toll on the nation’s economy since 2007. Individuals who lacked sufficient credit ratings or down payments resorted to subprime mortgages to finance their homes Defaults on subprime and other mortgages precipitated the foreclosure crisis, which contributed to the recent recession and national financial crisis (Odetunde, 2015). Subprime mortgages were appropriate for borrowers with substandard credit and Alternate-A paper loans were

After the market crashed back in September of 2008 housing prices came crashing down as well. The fair value or market value of these mortgages was well below the purchase price for these homes. This left many debtors stuck with mortgages worth more than the value of their homes. Homeowners have no incentive to continue to make large mortgage payments on homes that are valued at less than their current mortgages. This situation has caused many homeowners to default or short-sell their homes in order to get out of these mortgage agreements. In addition, growing unemployment has caused many homeowners with subprime mortgage agreements to default as well.

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

Although I have been stressing the fact there is no reason more substantial than the other, there is one aspect of The Great Recession that evidently impacted my personal life more than other aspects. That particular aspect is the Housing Crisis. However, the root of the Housing Crisis coincides with the Sub-Prime Mortgage Crisis. Now, what is a Sub-prime mortgage? A subprime mortgage is a type of loan that is granted to individuals with poor credit ratings, and therefore do not qualify for

The Subprime Mortgage Crisis or so called “United Housing Bubble” is considered as the most serious recession after 1929. The crisis involved not only one or couple companies but the whole U.S. Financial and Real Estate industry. Furthermore, the crisis lead to millions of people in US lost their houses, or homes and several industry giants failed down like Lehman Brothers, American International Group, and Merrill Lynch and so on. The effect of the crisis influenced not only America but also the economics of the whole world in the next few years.

The problem was everyone who qualified for a mortgage already had one. Lenders knew if they sold a mortgage to a person that defaults the lender gets the house, and houses were always increasing in value in that market, that would be a valuable asset to sell. To keep up with the demand from investors, lenders started selling mortgages to borrowers who wouldn’t have qualified before because of the risk for default. These mortgages are called sub-prime mortgages and lenders started creating tons of them. In the unregulated market, lenders employed predatory tactics to get more borrowers with attractive offers such as no money down, no credit history required, even no proof of income. People never would have qualified before were now buying large houses, and the lenders sold their mortgages to Investment bankers. The investors packed subprime mortgages in with prime mortgages so credit agencies would still give a AAA rating. The rating Agencies who had a conflict of interest by receiving payments from the investment banks, had no liability if their credit ratings were correct or not. They turned a blind eye to the risky CDOs and kept giving AAA ratings. This worked for a while and everyone was happy including the new homeowners. The housing market became hyper inflated with more homeowners than ever. Wall Street continued to sell their CDO’s which were ticking time bombs. The subprime mortgages began

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.

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 financial crisis of 2008 occurred in early 2006 when the mortgage market showed apparent increasing rates of default. Due to these defaults, in 2006 there was a decline in US housing prices after years of exceptional growth. US citizens slowly watched their primary source of wealth deflate into barely anything. By 2007, the prime mortgage rates had higher default rates. Unfortunately Collateralized Mortgage Obligations, allowed this issue to spread from mortgages to other aspects of the American economy.

The effects of subprime mortgage were horrendous, as it causes domino effect in the entire chain. The risky ARMs loan had become a toxic debt, causing financial fragility (Ebrahim, et. al., 2014) which leads to economic collapse. There were too many debt in the economy and financial institutions starts to fall out. Large financial institutions in the United States like Bear Stearns, Merrill Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers, were either taken over, bailed out by the government or went bankrupt (Wikipedia, 2015). The collapse of Lehman Brothers and government’s refusal to bail-out had been the starting point for extraordinary downturn in global economy (Garnaut, 2009). Stemming from that, financial institutions now believe that no one is safe. Government