Sub-Prime Mortgage Crisis - What Caused It ? How Can Us Recover from It?

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 housing crisis of 2008 can trace its origins back to the stock market trends of the mid- to late 90 's. During a period of extended growth in the stock market, increased individual wealth among investors led to generalized increases in spending, including in the housing market. With more disposable income in the pockets of consumers, the demand for housing increased in the late 90 's. Due to the fact that homes are large projects and their construction takes a large amount of time, the supply of homes in the market is inelastic on the short term. Because of the fixed supply of homes, as per the law of supply, which

In 2008, the world experienced a tremendous financial crisis which rooted from the U.S housing market; moreover, it is considered by many economists as one of the worst recession since the Great Depression in 1930s. After posing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It brought governments down, ruined economies, crumble financial corporations and impoverish individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brother and AIG. These collapses not only influence own countries but also international area. Hence, the intervention of governments by changing and

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

Two economic factors affect supply in a stable housing market, price of related goods or similar houses, and the price of the good, best represented by style or size in the case of the housing market. The affluence of a community typically determines how much homes sell for in those communities, and therefore communities where a lot of people want to live become areas where average home prices are high. (Kumar, 1) There is little space in these affluent communities, and therefore little supply. A good example is New York City, where no homes are available, only apartment buildings, and very few apartments are actively exchanged each year.

The beginning of the crisis: From the early to the mid-2000’s, high-risk mortgages became available from lenders who funded mortgages by repackaging them into pools that were sold to investors. New financial products were used to apportion these risks, with private-label mortgage-backed securities providing most of the funding of subprime mortgages. The less

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

effectively encouraged frivolous spending and heavy borrowing allowing people to live beyond their means. Low interest rates also increased the discount value of assets and therefore increased their value. This created a house price boom in the UK and US. It was in the US that this twined with high levels of borrowing created the subprime lending market, whereby individuals with poor or no credit history borrowed vast subs of money to buy

6.3 TRILLION DOLLARS! This is how much the value of homes have fallen in the United States since its real estate peak back in July of 2006. After the price of houses peaked in 2006, they gradually started to decline until December 30th, 2008. This is when the Case-Shiller home price index which measured the value of homes, reported its largest price decrease in its entire history. From there we saw prices continue to decline until we hit all-time lows in 2012. The United States housing bubble burst will be talked about for years to come including many what caused it and how to prevent such occurrences in the future. Low interest rates, Housing bubble, subprime mortgages, as well as securitization all contributed to the housing market crash of 2008 and will all be explained in this paper. According to the general consensus, most people believe that the housing bubble was the main cause of the 2007-2009 economic recession in the United States of America.

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.

The 2008 mortgage crisis was preceded by a series of missteps and unfortunate circumstances culminating in a perfect storm that triggered the worst financial meltdown since the great depression. After experiencing an 87% increase in average home prices between January 2002 and mid –2006, the mortgage market steadily declined and the boom began to subside. Unfortunately, the boom soon became a bust and by the end of 2008, housing prices were about 25% below the peak level achieved in 2006. As a result liquidity and capital disappeared from the market. (Jeune Renay. Lessons Learned In The Aftermath Of The Mortgage Crisis). A period of unusually high home foreclosure rates that caused an impact on the economy is still some years later an unfolding story in many American cities. It was not just a subprime event, but a much broader phenomenon that was among the most notable economic events of recent years. This was the result of irresponsible buyers who borrowed much more than they could afford. Regardless of the cause, foreclosure was difficult for the individuals who experienced it. They simply were buyers who had not done their homework. Today is safe to say that home buying isn’t for everyone. Despite all that has been said and done about this crisis, one realizes a need to understand and discuss the lessons learned as well as determine silver linings drawn from the event which will more fully illustrate how buyers are benefiting today. The following paragraphs will explain

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.

These brokers have neither the credit skills nor the interest to conduct proper payment due of potential homebuyers. Their interest is only in selling the houses as fast as they can. The MBS instruments allowed all financial institutions to transfer the risks to other investors. The dissociation of ownership of assets from risks encouraged poor credit assessment and was fundamental increasing the risks.

The banks then created a new idea—linking investors to homeowners through mortgages. Ordinarily, a mortgage broker would connect a house-buying family to a mortgage lender, who would then supply them with a mortgage. In this system, everyone is happy—the mortgage broker earns a handsome commission, the mortgage lender earns a new mortgage, and the family is now a homeowner in a market of increasing housing prices.

Besides, low interest rates and large inflows of foreign funds created easy credit conditions for years before the crisis and that simulated the boom in housing construction (Steverman and Bogoslaw, 2008). Moreover, easy credit and money inflow greatly contributed to U.S housing bubble and the rise of house’s price.