Subprime Meltdown: American Housing and Global Financial Turmoil In early 2008, policy-makers in the United States needed to deal with the frightening after-effects of what had appeared to be a glorious housing boom. The most immediate problem was a wave of foreclosures, which a Senate report predicted could reach 2 million by the end of 2009. Lawmakers sought to relieve the resulting pain and to preserve the longstanding dream of raising the US homeownership rate. Amidst a sea of lawsuits and recrimination, they needed to figure out where the US system for financing home purchases had gone wrong and how it could be fixed. To do this, lawmakers needed to understand what had happened, particularly because housing had until then seemed …show more content…
New houses in these areas were often snapped up by eager investors and newspapers relished reporting on individuals who managed to resell houses at a gain even before they took possession of them. According to Loan Performance Inc, more than 12% of Phoenix-area mortgages were obtained by investors in 2004, as compared to just 5.8% nationwide in 2000.
Home finance before the 1990’s
In the United States, it was common to talk about the “Traditional” fixed 30 year mortgage. This instrument required the borrower to make a constant stream of monthly payments during the 30 year term of the loan. These payments were specified in advance; so the interest rate on this loan was fixed. Many of these traditional loans allowed borrowers to ‘pre-pay” their mortgages without penalty. When interest rates declined, borrowers often took advantage of this feature and refinanced their homes at lower rates.
Savings and Loan Associations (S&Ls) already offered mortgages with constant payments before the Great Depression, though they were typically less than 12 years long. At the time, other lenders mostly offered short-term mortgages that needed to be refinanced because they had “balloon” payments at the end. During the Great Depression, many households went into default in part because this refinancing became difficult. One government response was to create the Home Owners Loan Corporation
However, hope might be on the horizon for the victims of the mortgage disaster of 2007/2008. Home buyers who were foreclosed upon years ago, or boomerang buyers, are beginning to be eligible to buy homes again. While some feel hope after feeling bamboozled by lenders and Fannie Mae and Freddie Mac, some feel anxious and fearful of the thought of buying again. Yet there are lessons that have been learned by the mortgage meltdown. Fannie Mae and Freddie Mac provided a lesson for the
In the United States, the lending industry’s lack of aggressive monitoring was a big part of the housing market crash of 2006. The Las Vegas housing market, once a booming industry in 2003 to 2005, is now one of the top 3 cities in foreclosure properties. I sat with Suzanne Pashnick to get her take on what happened, who is to be blamed and what can be done for the city to recover. Suzanne has been in the real estate field since 1995 and began her career in Michigan. In 2005, she moved to Las Vegas and continued her career in real estate and is currently an agent for CENTURY 21 MoneyWorld and remains licensed in Nevada.
Where there is darkness there is ultimately light and the various homeownership opportunities under the current economy reflect this notion. Real estate prices
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.
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 foreclosure crisis in America has impacted everyone- even those who don’t own homes. Our nation is currently struggling with high unemployment, a relatively illiquid credit market, and a deficit that raises serious concerns about the value of the US Dollar in the not too distant future. With interest rates already at historic lows and the government pursuing an unprecedented policy of quantitative monetary easing, options for government intervention are limited. While there is no simple solution to this problem, I think that we must look at the reasons the housing market went into crisis, and based on that develop a regulatory system that will allow us to avoid another situation like this in the future. If Americans believe
The Great Recession was an economic behemoth the likes the United States had never seen before since the Great Depression. In fact, the Great Recession of 2007-2009 was an unmitigated disaster for the US and world economy, its effects still lasting to this day. The Great Recession was spurred by an influx in subprime mortgages and loans. Normally, banks lend money to those they know are capable of paying it back with interest; however, in the early 2000s, banks took advantage of the unregulated sector of subprime loans, creating a substantial housing bubble at the cost of considerable profit. Soon millions of low-income and middle-class Americans were buying homes for much more than their normal income could pay for, but with ever increasing
As the economy drops and foreclosures are on the rise, millions of Americans who were financially stable several years ago are asking the same question, “How could this happen to me?” The crisis has occupied the minds of politicians, who are trying desperately to solve this problem, but the tragedy continues as more and more Americans are foreclosed on with no alternatives. The foreclosure crisis will not be solved by simply lowering interest rates, firing loan brokers, or other short-term, ineffective solutions. The long term solution to the housing crisis has nothing to do with housing. The government has lost its way and needs to redirect the way the whole economy is run.
The issue with the housing market began around the year 2000. This was also known as the start of the Real Estate Boom. Banks started to handout subprime loans, also known as junk loans with super high interest rates (Lewis). Normally, lower income families would not be able to receive
The Housing Disaster and subsequent Great Recession of 2007 were predicted by several well-known Economists, although it still caught a majority of the Country and World by surprise! I wasn’t prepared for this economic shock either, as I had just finished real estate school and passed my State and National licensing exams during the previous year. It was a tough start to a real estate business but proved valuable in the lessons I learned during those next several years.
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.
Since the inflation of the United States dollar continues to rise every year, housing prices in relation to the peak of the market in 2006 are at a standstill, or even are decreasing in many cities. The housing market has fully recovered from the devastation of 2006. Currently, homes in San Francisco are worth, on average, almost 15% more than in 2008. Unfortunately, due to inflation the majority of the value in the housing market has decreased since the mortgage fallout, by 19.4% (“American House Prices”). The housing market peaked just before the collapse of 2006, mainly because banks became greedy and did not check the majority of their clients credit scores. As the time passed, banks soon realized that their plans were not unfolding as planned. The Washington Post estimated that at the time of the fallout 1 in 5 mortgage holders had below average credit. In many banks, whole empires were controlled by “subprime mortgages”. This meant homebuyers who had poor credit scores dictated the
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 foreclosure crisis, which tragically happened several years ago, stole away the homes from countless Americans and left them high and dry. These Americans were not even neglecting to pay for their mortgage on purpose; the economy took a drastic downfall and took all of those unshielded Americans with it. Now, these Americans are left with many questions that are unanswered – until now. They still have the chance to improve their credit, test out their dream home, and thrive in the current reasonable home prices and interest rates. All the potential buyer has to do is know where to find that information and how to use it. Now, it is time to explore those tempting options.
Around 2006 the price of houses began to fall substantially fast. “The oversupply of houses and lack of buyers pushed the house prices down until they really plunged in the late 2006 and early 2007” (The Subprime Mortgage Crisis Explained). These actions threw investors into a big dilemma. In the beginning they believed buying the mortgages would bring them a profit, but quickly realized that the mortgages would cost them more financial damage than reselling the homes. “Nationwide, home vales have declined about 16% since the summer of 2006 and experts project that the drop will continue until homes have lost about 25% of their value” (Biroonak, 2008). In other words mortgage homes are “underwater”, that is, the mortgage owed equals or exceeds the value of the house (Biroonak, 2008). Investors and homeowners started to go more in debt trying to pay off their original debts.