Mortgage Crisis Essays

1804 Words Dec 6th, 2008 8 Pages
Abstract

In my research you will find that I outlined the cause and effect of the mortgage crisis. I also speak on the falling housing prices due to the mortgage crisis and the domino effect that will be created on and for the economy. I will also speak on the foreclosure rates caused by sub-prime loans and no fall back plan to help in the case of the mortgagor defaults.

The Mortgage Crisis

Thesis Statement:

The mortgage crisis that has caused house prices to fall and foreclosures to occur across the United States will create the need to alter the financial mortgage industry policies; as the impact it has can go as far as causing a consumer recession due to the low unemployment rate, rising
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The mortgage crisis is simply one side of the coin.
The main cause of the mortgage crisis is the changes in policy for the mortgage industry. In the past, a fixed mortgage was the prime form of lending. All mortgages have the same payments for the mortgage duration and a large down payment was essential. The calculation of the mortgage was based on the initial amount borrowed, and house assessment rather than the rising value of the income and the house over the years.
In order to encourage people to buy more houses and boost the real estate market, the homebuilders, financial lenders, and the government created new financial instruments of calculation that were not researched properly. Lenders sold mortgages to investors that allowed the risk of default to be covered even though the mortgage was in a financial stretch for the borrower. Borrowers did not read the fine print and made decisions that they could not afford. The major banks Federal and otherwise, kept the interest rates low causing investors to take risks to get high returns in the short term, disregarding the long terms security of the whole process.
The result was sub-prime borrowers could buy houses they could not afford and prime borrowers could have extra cash flow that in normal circumstances would not have been possible, allowing lenders to make bigger plans in terms of growth etc. The housing epidemic created a false market boom that drove prices up as consumer demands grew.
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