Analysis Of The Movie ' The Big Short '

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.

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.

After the optimistic forecast from the realstate that the houses value were going to increase, many institutions started to make adjustments to take profit from this trend. In some cases, prime mortgages were allowed for subprime borrowers to take. This might look like a great idea to financial institutions because the house values were rising: if a people (who in the first place couldn’t afford a house) stop paying their mortgages then the bank could sell the house for a value greater than the one at the moment of default. Everything was going well, so how is it that the crisis unfolded? Well, these institutions wanted to make more profit

Subprime lending became prevalent in the early 2000’s when property values were sky-rocketing and many Americans thought they would fulfill their home ownership dreams, by obtaining loans they may not otherwise qualify for. A subprime loan is a loan offered to an individual who does not qualify for a loan at the prime rate due to their credit history. Subprime loans have higher interest rates because of the risk that the lender is taking. During the early 2000’s the housing market was great for homebuyers, since interest rates where low and property values

The beginning of the crisis is rooted in banks giving out subprime loans to people who would have not otherwise been given these loans. The banks assumed that these loans could be bundled and the numbers proved that they were safe investments, because enough people would pay their loans back.

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

Several years ago, many of us could not imagine mortgage meltdown ending. It seemed as if the foreclosures/short sales were increasing and the American dream of buying a home was decreasing. Many people felt hopeless and cheated when it came to the economy’s poor status due to the housing crash. Many lessons were learned from the collapse and although it may seem hard to believe, there were silver linings in the mistakes made during the mortgage meltdown. Today, real estate buyers are benefiting from the past mistakes and have more confidence in their home buying purchases.

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

Low interest rates and the ease of borrowing money are two primary causes of the current recession. In 2007, 37% of the total home mortgage loans were considered a “liar loan” because the mortgage lender did not evaluate income or assests (Russo, Mitschow, & Schinski, 2015). The Federal Government sought to encourage home loaners to loan to risky homebuyers and they kept low interest rates for far too long. During this time mortgage brokers began selling home mortgage loans rather than a commercial banking system. They were not subject to the scrutinized federal regulations, and lent money to many individuals who were unable to afford the homes that they were buying. Many people overestimate their ability to pay debt, resulting in them buying expensive homes because they were approved regardless of their credit or income. The crisis occurred when homes values dropped due to the ability for individuals to buy expensive homes, which resulted in people owing more on their homes than the value of the house. It was nearly impossible for people to make a profit when selling their homes, so many homeowner’s felt that it would be best to default on their loans as they were losing money paying for a home with less value than the actual loan. The more foreclosures there was, the more home values diminished and causing more and more

Before the 1970s the banking was not a business that you went into to make money. That was until Louis Ranieri came around. Louis Ranieri had one idea that changed the housing market forever. His plan was to have a mortgage back security. A mortgage back security is an assist based security backed by a mortgage. For example, if you use your mortgage to start a business, your business is backed by that mortgage. The average mortgage loan has a fixed rate loan and takes thirty years to pay off, but then he thought to bundle them all together. They thought these would still be less risky because who would not pay their mortgage. They were doing hundreds of million dollars in mortgage bonds a year, but that all changed when they ran out of mortgages to put into the bonds. If there were no bonds then there was nothing left to make money, and the banking world was going to back to the way it was. Rather than letting that happen, the banks made a loan called a subprime loan.

In the early-2000s, Moody’s, one of the leading credit rating agencies in the world, evaluated thousands of bonds backed by so-called “subprime” residential mortgages—home loans made to those with both low incomes and poor credit scores. When housing prices began to fall in 2006, the value of these bonds disintegrated, and Moody’s was compelled to downgrade them significantly. In late 2008, several commercial banks, investment banks, and mortgage lenders that had been

This is the entire plot of The Big Short. I found this movie is really entertaining not only because it was funny, but it happened to be true. The film focused on the a few financial experts who suspects that the housing market was about to collapse. So if you happen to understand the credit default swap or CODs, you might enjoy this movie. However, if you don’t understand them, don’t worry, I promise you will get to learn about the

For the most part, the film in an entertaining way, does a good job explaining how those transactions, along with greed, stupidity and arrogance played a role in causing the crisis. Some analysts like economist Jeffrey Tucker in his Newsweek article “Did ‘the Big Short’ get it right” argue that the film did not include the Federal Reserve’s responsibility in creating the mess and others say it avoided the criminal aspect. The film cleverly uses Jenga blocks, old fish ready for the trash in a stew, and secondary bets on a seemingly sure bet poker hand held by Selena Gomez, to help explain what transpired. In the case of the poker hand people were making leveraged bets on known odds, they knew the risk of losing.

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 Big Short: Inside the Doomsday Machine by Michael Lewis is a non-fiction New York Times #1 bestseller. This text is published by W.W. Norton & Company and contains 320 pages. This is a book that focuses in on the 2008 financial crisis and the build up of the housing and credit bubble during the 2000’s. The author channels in on the persons who saw the crisis coming that wanted to protect their investments or did not want to speak of the issue.