Subprime Meltdown Hbr Case

1454 Words May 10th, 2012 6 Pages
The debacle that is the subprime crisis is said to be one of the worst in history, and sadly, I do not think we will learn enough from it. There are many factors that contributed to this situation and I will try to focus on a few I feel are most important. I realize that this is a finance class and the focus should be on the financial institutions aspect, however, this scenario played out in the real world where there are almost infinite variables. As a 1st generation immigrant, I can appreciate the spirit of this lending; it has allowed many illegal aliens in my eastern European community to be able to purchase a house regardless of the fact that they couldn’t document income since the worked “under the table.” I know many families that …show more content…
They felt that either way they could make a profit; either through the interest on the loan or through the 12% increase in house value that was around in 2006. Had lenders looked at the market with a more realistic expectation, I believe they would have regulated themselves; a perfect example is Wells Fargo. Although they did have subprime loans, they did not engage in the practice with as much abandonment as the rest of the market did. Had lenders saw what was really happening and not what they wanted to see (never ending housing growth translating to unlimited revenue from loans), government would not have had to step in to regulate, nor would they have had to step in to bail them out. On the other side of the coin are the consumers and I think the best way to sum them up is with the quote “If you give them enough rope, they will hang themselves.” With lenders jumping at every opportunity to give away money, it helped created a culture that told consumers they could have anything they wanted. People were buying $600,000 houses on a $40,000 a year salary because they could; they didn’t care that they wouldn’t be able to afford the payments when they balloon in 5 years, because they could just refinance. If they had $70,000 in equity in their home, why let it just sit there when they could take out a second mortgage and buy a Jaguar or a Mercedes. After