Mortgage Crisis Essay

Adams, William, Liran Einav, and Jonathan Levin (2009), “Liquidity Constraints and Imperfect Information in Subprime Lending,” The American Economic Review 99(1), 49–84.

During this time period, homeownership typically required a 20 percent down payment (Melicher & Norton, 2014, 168). Lending institutions were very careful about whom they lent money to, and credit standards were high (Melicher & Norton, 2014, 168). Melicher & Norton (2014) called this the “save now, spend later” philosophy, and it would change in the coming years (p. 168).

The increased pressure on mortgage lenders to be socially responsible and lend to all groups create an opportunity for banks to lend more and charge higher fees to select borrowers who they feel pose a greater risk of default (Palmer, 2015). The primary purpose of the CRA is to assist minorities and lower income individuals from neglect and discrimination. The CRA policy might have forced the banks to implement change to aid individuals who may not qualify for a home loan to be eligible. If the banks did not follow suit with the CRA policies, they might have missed opportunities, such as mergers, acquisitions, and profitability (Elbarouski, 2016). Allen (2011) concluded loose lending led to expanding homeownership in the United States, but lending to riskier borrowers led to an increase in the foreclosure

Prior to the 2008 economic depression, obtaining a mortgage was relatively simple for home buyers. However, many of those mortgages had provisions that made it difficult for borrowers to repay their mortgages (“Dodd-Frank,” n.d.). As a result, many homeowners lost their homes when they were unable to repay their mortgages, which led to the real estate crisis. In 2010 the Mortgage Reform and Anti-Predatory Lending Act, also known as the Dodd-Frank Act, was enacted to reform how mortgage servicers vetted borrowers and to eliminate the use of predatory loan practices (Cheeseman, 2013, p. 485). Under the Dodd-Frank Act, creditors must establish borrower’s credit history, income and expected income, debt-to-income ratio, and other factors before

In an attempt to improve the model, we attempt to do a multiple regression model predicting CREDIT BALANCE based on INCOME, SIZE and YEARS. 11. Using MINITAB run the

The student loan trouble is surely a big problem in our society: college students are struggling giant quantities of student debt, and they 're defaulting on that debt and making their potential to get admission to future credit score awful already. The procedures to student loan debt series are filled up with problems, in addition to wrong recovery strategies and critical concerning compensation alternatives. However, the recent public procedure discussions pass over among the key problems that correlates to the debt mess, leading to proffered solutions that leave out their mark too. Start with those top issues about student loans: They said student debt loans signify averages, even though the quantities owed may be dramatically different from each student. This is why answers which includes the mandated debt calculator on college web sites or the cutting-edge university Scorecard do no longer help the issues; the disclosure of time-honored statistics does no longer impact student desire meaningfully.

people's need for extra funding has led to the extension of credit to large segments of the population who were previously deemed unqualified. However, some lenders have tried

Additionally, a primary factor in the financial crisis was unsustainable mortgage lending. Subprime mortgages increased from eight percent of total mortgages in 2004 to twenty percent in 2006 with more than 90 percent of these mortgages being adjustable rate mortgages allowing borrowers to qualify for loans for which they did not have long-term repayment capacity. Furthermore, lenders lowered their loan underwriting standards especially for loan to appraised value and repayment capacity to allow borrowers to obtain significantly larger loans than in the past. System institutions did not participate in lowered lending standards. The System is prohibited by regulation from making mortgage loans with

The government has ensured the money will be repaid through the wage garnishment system. Only a small percentage of consumers endure this process because debt can be collected by numerous means (Arnold). In response, credit debt was virtually non-existent until 1970, now Americans have an average of $3,500. A time used to exist where only the wealthy had access to credit cards, but the credit score industry caused financial companies to feel comfortable with the broadening of credit cards across the population (Indiviglio). Letting consumers purchase those big-ticket items also enables them the ability to spend more holistically. For example, $20 cash is manageable for a few groceries, but a credit card can cover those groceries and a new television simultaneously. Credit cards seem to give consumers an infinite amount of money at their fingertips. After so much debt has risen, creditors resort to the courts. Over a million lawsuits are filed annually concerning credit card debt, which does not seem like a small percentage (Arnold). And through wage garnishment, creditors collect their payment whether the consumer can afford it or not. The consumers should not be treated in this manner for using a credit card in the means that it was distributed for.

Step two. Again, from the example, individuals qualify for loans based on their current income and expenses. Often a good part of their expenses are credit card debts. In our failing economy, credit card interest rates have skyrocketed. In many instances, people cannot qualify for a certain loan because their credit card payments and other

High default rates can be attributed to multiple factors. There is, however, a widespread view that student characteristics and background mostly account for this policy dilemma, including (a) the characteristics of students as they begin college (i.e.

When a lender is offering a mortgage loan to a borrower, he or she has to determine what are the risks involved. In order to determine these risks, the lender uses a process known as mortgage underwriting, in which some parameters are assessed. The underwriters consider risks that fall under the category of credit, capacity and collateral. The decision of the underwriter is the final one to either approve a loan or decline it. This process is so cumbersome that lenders at times contract mortgage underwriting.

The company’s incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan’s value, versus 0.20 percent on loans one step up the quality ladder. For years, a software system in Countrywide’s subprime unit, sales representatives used to calculate the loan type that a borrower qualified for, did not allow the input of a borrower’s cash reserves (Morgenson, 2007).

Due to such events as the subprime mortgage crisis, the auto market and Wall Street’s failure, the United States suffered a severe economic blow. Looking at the situation from an economic view, supply is supposed to equal demand. Due to the mortgage crisis and the careless attempts of some to make money, there is a superfluous amount of empty homes throughout the United States. In the subprime mortgage crisis, the nature of the failure was the inability to account for money given to individuals, who lack the appropriate requirements. In order to obtain a loan, collateral is needed. References were not being checked and poor credit history went ignored. People were obtaining loans and not paying attention to the interests rates associated. “This time around, the slack standards allowed millions of high-risk borrowers to get easy home mortgages. When this so-called subprime market collapsed beginning about a year ago, ordinary working people bore the brunt” (Gallagher, 2008). Companies were so anxious to place people in homes, that it cost them billions of dollars and

From a social contract theory standpoint, enforcing these laws would have to make lenders agree to put caps on their interest rates. I believe that this would also reduce the competition of lenders trying to get those that are financially troubled. For the consumer, when they enter into a lending contract it would benefit them as well giving them peace of mind knowing that they can get a loan without interest gouging. However social contract theory recognizes that people are rational, so consumer would have to understand the fact they would have to pay their debts on time etc.