Subprime Mortgage Crisis

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.

Subprime mortgage lending is the origination of residential mortgage loans to customers with impaired credit histories. Typically, these borrowers have lower credit scores and/or other credit deficiencies that prevent them from qualifying for prime mortgages. Subprime borrowers pay premium above the prime market rate in order to compensate the lender for bearing greater default risk. In addition, subprime borrowers pay higher origination and continuous costs, such as applications fees, appraisal fees, mortgage insurance payments, late fees and fines for delinquent payments.

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

The increased pressure on mortgage lenders to be socially responsible and lend to all groups create an opportunity for banks to lend more and charge higher fees to select borrowers who they feel pose a greater risk of default (Palmer, 2015). The primary purpose of the CRA is to assist minorities and lower income individuals from neglect and discrimination. The CRA policy might have forced the banks to implement change to aid individuals who may not qualify for a home loan to be eligible. If the banks did not follow suit with the CRA policies, they might have missed opportunities, such as mergers, acquisitions, and profitability (Elbarouski, 2016). Allen (2011) concluded loose lending led to expanding homeownership in the United States, but lending to riskier borrowers led to an increase in the foreclosure

Many people today would consider the 2008, United States financial crisis a simple “malfunction” or “mistake”, but it was nothing close to that. Contrary to what many believe, renowned economists and financial advisors regarded the financial crisis of 2007 and 2008 to be the most devastating crisis since the Great Depression of the 1930’s. To make matters worse, the decline in the economy expanded nationwide, resulting in the recession of 2007 to 2009 (Brue). David Einhorn, CEO of GreenHorn Capital, even goes as far as to say "What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn't an accident. We didn't get unlucky. The crisis came

A few years later the market took a turn for the worse, where interest rates were on the rise, and homes were losing their value quickly. Now borrowers that were in these interest only ARM’s needed to refinance these loans because the rates were going up, to a point where the homeowner was not be able to afford the payment. The Federal Reserve tried to stimulate the economy by lowering interest rates during the recession in early 2001, from over 6% in 2000, to a rate just above 1.25% in 2002. These low rates encouraged many Americans to apply for loans for homes that a few years ago they would have not been able to. To encourage the homeownership boom, the Bush administration urged Fannie Mae and Freddie Mac to allot more money for low-income borrowers so they could buy their own homes. This resulted in the subprime mortgage

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

Chapter 3: Causes of the Financial Crisis and the Slow Recovery Wallison, Peter J. "Is the Dodd-Frank Act Responsible for the Economy's Slow Recovery from the Financial Crisis and the Ensuing Recession? *." Https://www.hillsdale.edu/.../uploads/2016/02/FMF-2015-Dodd-Frank.pdf. Ninth Hillsdale College Free Market Forum, 16 Oct. 2015. Web. 20 Mar. 2017.

Ultimately these lenders mortgages to people with poor credit and a high risk to default. Lenders were willing to make give out these subprime mortgages for countless reasons. Firstly these lenders had large amounts of funds to lend because strong economy leading up to recession. With this abundant capital lenders were willing to make riskier loans to help increase their investment returns. Lenders also thought these subprime mortgages were less risky than usual because rates were low, the economy was healthy and in general individuals were making their payments. The amount of subprime mortgages went from 173 billion in 2001 to 665 billion in 2005. A second reason for why lenders were giving out these subprime loans is due to personal greed and selfishness. Many heads of banks made huge bonuses based on high volumes and fraudulent appraisals. One way these lenders were able to do more volume was through mortgage fraud for profit. Mortgage fraud for profit is a illegal practice committed by industry professional who misrepresent or omit important information about their client’s employment, income, credit or property value with the goal of maximizing their own profits. The FBI found 63,713 cases of mortgage fraud during the year of 2008 alone and 46,717 during the year of 2007. They found out that in many low-credit, low income ZIP codes buyer income was overstated

First, everyone who has bought a house themselves, or has been near the process of home buying, knows that first time home buyers make mistakes. They get wrapped up in the charm of a house while failing to notice issues, and failing to notice even minor issues can have very costly consequences. For many of the victims of subprime lending this was their first time being able to purchase a house which likely made them become wrapped in the emotions of home buying. Rather than, looking at the houses and prices

The most commonly known sub-prime finance crisis came into illumination when a sudden rise in home foreclosures in 2006 twirled seemingly out of control in 2007, triggering a nationwide economic crisis that went worldwide within the year. The greatest responsibility is pointed at the lenders who created such problems. It was the lenders who, at the end of the day, lend finances to citizens with poor credit and a high risk of failure to pay. When the Feds inundated the markets with growing capital

Although I was fairly “green” to the business, I could recognize some loan programs and practices that sent chills down my spine and raised the hair on the back of my neck. What were worst of these programs and practices? The overall consensus agrees that risky lending practices and sub-prime mortgages were key influences in the housing disaster. Inflated market and sales prices also played an important role.

Additionally, a primary factor in the financial crisis was unsustainable mortgage lending. Subprime mortgages increased from eight percent of total mortgages in 2004 to twenty percent in 2006 with more than 90 percent of these mortgages being adjustable rate mortgages allowing borrowers to qualify for loans for which they did not have long-term repayment capacity. Furthermore, lenders lowered their loan underwriting standards especially for loan to appraised value and repayment capacity to allow borrowers to obtain significantly larger loans than in the past. System institutions did not participate in lowered lending standards. The System is prohibited by regulation from making mortgage loans with

*Disclaimer* I don’t know much about accounting (or anything in business for that matter) at this point in time. This will be the first time I will be looking into the sub-prime mortgage crisis and my opinions could well be wrong. However this is exactly what it looks like, my opinion on this topic. Hopefully it is sufficient for the purposes of this discussion and this class.

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