Impact Of The Financial Crisis On America

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.

Because debt financing is used in most if not all RE transactions, mortgages are necessary for eliminating uncertainty; Not only for the borrower but the lender as well. The lender can be certain of what risks are involved and this allows them to determine the risk premium in the interest rate. The borrower benefits immensely from the mortgage as it reduces the cost of borrowing, it details financial rights and obligations, and increases chances of a positive outcome.

Home ownership is the American dream! It is one of the most costly purchases an individual or family can make in their lifetime. Some people save until they have cash to purchase however, many people borrow money from a bank or lending institution; when a person borrows money to purchase a home the loan is called a mortgage. The lender is called the mortgagee and the borrower is called the mortgagor; banks have several different types of mortgages: fixed rate mortgage, adjustable rate mortgage, investment mortgage and much more. Borrowers have to undergo the lender underwriting process to show financial capability of repaying the mortgage (Makarov & Plantin, 2013). In this article I will use a fictitious person named “Julianna,” she is in the process of buying her first home at age 30; I will be her lender and will use mathematical procedures to find out what is her down payment, principle, installment payment, points (closing cost), mortgage maturity value and total interest paid.

For many years America was the lone superpower in the world after the collapse of the USSR in the 1990’s. During this same decade, America saw the internet revolution and a surplus in the budget for the first time in a long time. This meant that the economy was surging, and a lot of internet companies saw their stocks rising rapidly and their shareholders also sharing in the profits. This all came to a quick end in the 1990’s with the “dot.com” bubble popping resulting in a downturn at the end of the decade. This compiled with the events of 9/11 a few short years later created a large amount of instability throughout the economy of the country, with this uncertainty looming it only took a few more years for the housing market to collapse due to oversaturation of the housing market. Then finally in October of 2008, the auto industry took a nose dive along with a banking crisis shortly

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.

In the 1980s, investments banks such as Goldman Sachs, Merrill Lynch, Bear Stearns, JP Morgan, and Morgan Stanley started selling mortgage bonds. Mortgage bonds were a collection of thousands of home mortgages, purchased from lenders, and their associated income streams (monthly payment). To address the fact that some homeowners often refinance their debt when interest rates are low which prematurely pays off the debt, mortgage bonds were stacked into layers called ‘tranches’. The lowest tranche represented mortgages to be paid off early, and the highest layer was the last mortgages to be paid off.

Adjustable-rate mortgages: in simple terms, an adjustable-rate mortgage is when the interest on a loan changes with the market. This sounds nice if the interest rate is

In the era of intensive globalisation financial crisis of USA followed by crises in other countries as well, starting from

The company’s products include different mortgage and loan types, with four main products in total. Quicken Loans offers both adjustable rate (ARM) mortgages and fixed rate mortgages. Adjustable rate mortgages are adjusted periodically and are determined on changes in a specific index. Interest rate caps are usually included on ARM loans, and these interests following the trends of one’s specific overall interest rates. Fixed rate mortgage loans are usually in fifteen or thirty year terms, with the borrower agreeing on a fixed payment each month that does not fluctuate. Conventional loans are loans not secured by a government sponsored entity, such as the FHA or VA. Conventional loans conform to the Freddie Mac and Fannie Mae product lines. FHA loans are backed by the Federal Housing and Urban Development Administration. These are the most popular loans for first time home buyers, attending to allow housing to become more affordable. They are limited to specific home types and home locations. Quicken Loans jumbo mortgage loans are always larger than the limits set by the Freddie Mac and Fannie Mae agencies each January, with the agencies purchasing the underlying securities from mortgage originators. Currently, the jumbo loans are offered at

The stock market crash of 1929 was one of the worst events in U.S. history. This topic was chosen to show the affects of the stock market crash. Even though the U.S. was not able to trade or sell, the stock market crash was highly effective because, their was a lost of jobs, shops were going out of business, banks lost money. This information shows the stock market crash of 1929 to be a major impact on

b) Balloon Mortgage: This loan is not fully amortizing. Instead the entire loan balance is due on the maturity date. An example of a balloon mortgage occurs when the payment is amortized over a 30 year period, but balloons in 10 years making the remaining unpaid principal balance due in 10 years. At the end of the balloon period, the borrower must find alternative financing to refinance the remaining balance. The terms of the refinance could potentially be less favorable or even worse; the borrower cannot obtain new financing.

New loan offerings make it easier to buy a home, but harder to pick which mortgage is right for you. The standard 30-year fixed rate mortgage allows predictable payments. If you’re planning on moving quickly, consider an adjustable rate mortgage, which has low

The American homeowners have been forced to accept these adjustable rate loans in order to lower their monthly payment by a few hundred dollars. In the long-term, most end up refinancing down the line and losing all the money they saved monthly on additional closing costs, to modify an adjustable interest rate loan.

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

An increase in loan packaging, marketing and incentives encouraged borrowers to undertake difficult mortgages so they believed that they would be able to refinance quickly at more favourable terms. People borrowed money to buy the house and then expected the price to rise and sold so that they could pay off the debt which owed to the bank and demanded a new loan to buy another house. However, once the interest rate began to rise and house’s price dropped in 2007, refinancing became more difficult and banks could not collect their mortgages.