Sub-Prime Mortgages and the Death of the American Dream Essay

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

So what exactly happened to the subprime mortgage market that caused all of this? It actually goes back to 1998 with the Glass-Steagall legislation, which separated regular banks and investment banks was repealed in 1998. This allowed banks, whose deposits were guaranteed by the FDIC to engage in highly risky business because they were guaranteed their deposits up to $250,000 per depositor. Following the dot-com bust in 2000, the Federal Reserve dropped rates to 1 percent and kept them there for an extended period. This drop in rates caused bank managers to have to go after higher-yielding bonds because they could no longer make decent yields off of municipal bonds or treasury bonds. They, like Wall Street, got creative with lending, and went after high-yield mortgage-backed securities like subprime mortgages which were mostly dominated by non-bank originators but because of the demand, many banks and private sector lenders jumped on board to increase profits.

The recent mortgage crisis in the US was unprecedented. It led to a massive clampdown of financial institutions, occasioning one of the worst financial melt-downs the US has ever faced (Jaffe, 2008). Quite naturally, it would be necessary to examine the cause of the crisis in order to draft prophylactic measures that would prevent the same financial disaster in the future. This paper will discuss the events that led to the mortgage crisis.

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

The mortgage crisis we are experiencing in the United States today is already ranking as among the most serious economic events since the Great Depression of the 1930’s. Hardly a day goes by without a story in the newspaper or on the cable news stations reporting about the increase in the number of foreclosures across the United States. The effects of this crisis have spread across all financial markets, where in the end all of us are paying a price for this home mortgage crisis. When the housing market collapsed, so did the availability of credit which our economy depends upon. The home mortgage crisis, the financial crisis and overall economic crisis all need to address by the

During 2007 through 2010 there existed what we commonly refer to as the subprime mortgage crisis. Through deduction of readings by those considered esteemed in the realm of finance - such as Ben Bernanke - the crisis arose out of an earlier expansion of mortgage credit. This included extending mortgages to borrowers who previously would have had difficulty getting mortgages; this both contributed to and was facilitated by rapidly rising home prices. Pre-subprime mortgages, those looking to buy homes found it difficult to obtain mortgages if they had below average credit histories, provided small down payments or sought high-payment loans without the collateral, income, and/or credit history to match with their mortgage request. Indeed some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA), otherwise, those facing limited credit options, rented. Because of these processes, home ownership fluctuated around 65 percent, mortgage foreclosure rates were low, and home construction and house prices mainly reflected swings in mortgage interest rates and income.

did or should have known that they could not afford to repay subprime mortgage loans, as

The subprime mortgage crisis was a result of mortgage brokers selling mortgage products to people with terrible credit, no down payments for the house, no stable income into the home, and basically no nothing instead of selling it to responsible people who they knew would not default on their mortgage. (Let’s call the reliable homeowners prime and the unreliable ones sub-prime for times sake). They would give out home mortgages to everyone knowing that they wouldn’t be responsible for the mortgage that they give out, but that they would be able to sell them to investment bankers, who would then sell them to investors, hedge funds, etc or at least be left with a house as housing prices always rise. But let’s start from the beginning of how this whole mess started.

There is no doubt that subprime lending was a major cause of the Recession. It was a tactic used by investment banks in order to get more money from unsuspecting homeowners. However, lenders found out that most of the people who were qualified to have a mortgage already had one. In turn, the lenders had to lower their credit criteria for people to take out a loan on a house. This is how the term subprime lending came to be in the financial world. As a result of subprime lending, the investors were able to make millions off of these mortgages. People who qualified for a subprime mortgage usually had a credit score below that of 620. To make the subprime mortgage deal more customer friendly, the lending banks decided to have the people who qualified for these mortgages didn’t have to have a down payment. Normally, the down payment would be as much as 20%, but this made it easier for people to get mortgages without having to worry about how much money they needed at the beginning of their purchase. “ Many American homeowners bought houses they could not afford,

The problem was everyone who qualified for a mortgage already had one. Lenders knew if they sold a mortgage to a person that defaults the lender gets the house, and houses were always increasing in value in that market, that would be a valuable asset to sell. To keep up with the demand from investors, lenders started selling mortgages to borrowers who wouldn’t have qualified before because of the risk for default. These mortgages are called sub-prime mortgages and lenders started creating tons of them. In the unregulated market, lenders employed predatory tactics to get more borrowers with attractive offers such as no money down, no credit history required, even no proof of income. People never would have qualified before were now buying large houses, and the lenders sold their mortgages to Investment bankers. The investors packed subprime mortgages in with prime mortgages so credit agencies would still give a AAA rating. The rating Agencies who had a conflict of interest by receiving payments from the investment banks, had no liability if their credit ratings were correct or not. They turned a blind eye to the risky CDOs and kept giving AAA ratings. This worked for a while and everyone was happy including the new homeowners. The housing market became hyper inflated with more homeowners than ever. Wall Street continued to sell their CDO’s which were ticking time bombs. The subprime mortgages began

The U.S. subprime mortgage crisis was a set of events and conditions that led to the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. After U.S. housing sales prices peaked in mid-2006 and began their steep decline, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher interest rates, mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U.S. and Europe.

The United States (U.S.) subprime mortgage crisis, also known as the “mortgage mess” or “mortgage meltdown,” was a set of events and conditions occurring from 2007 to 2010, which contributed to the U.S. great recession, the worst since the 1929 Depression. It was also the longest, lasting for 18 months (December 2007 - June 2009). It came to the public’s attention when a steep rise in home foreclosures in 2006 and seemingly out of control in 2007. It was triggered by a huge decline in home price resulting from the collapse of housing bubble, leading to a rise in subprime mortgage foreclosures, triggering a national financial crisis that went global within the year. The US sub-prime mortgage crisis

The subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system. The collapse of the US housing market has had a devastating effect on the nation, where the housing price boom was particularly pronounced, and the subsequent decline has been particularly disastrous. Hundreds of thousands of working and middle class citizens are in danger 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