The Downfall Of The Subprime Mortgage Market

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The Downfall of the Subprime Mortgage Market During the housing boom, the subprime mortgage market enhanced the revenues of lenders, investment bankers and investors alike. While some knew the trend would come to an end many did not. When the housing bubble burst and home prices declined the effect on those involved was enormous, financial institutions who originally had low debt to equity ratios, soon found themselves on the cusp of bankruptcy.
Housing Bubble Due to the U.S. Governments relaxed lending stipulations and low interest rates, the demand for houses soared from 1996 to 2006, consequently increasing home prices across the country. During this time period home prices rose nearly fifty percent (Li, 2015). Comparatively, from
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Moreover, the foreclosure rate varied from only 1.58% on prime loans to an outstanding 12.55% on subprime mortgage loans (Subprime Mortgage, 2016). Due to the collapse in the housing market, foreclosures caused an estimated $71 billion in losses at the end of 2007, as well as, another $32 billion is losses to properties neighboring the foreclosures (Li & Li, 2012). Consequently, investors began to see the risk associated with mortgage backed securities and began purchasing safer investment. The housing bubble burst had a profound effect on financial institutions involved in the securitization of subprime mortgages and as such was the tipping point to the financial crisis.
Effect of Lenders, investment banks, and investors Since, those involved in the subprime mortgage market assumed home prices would continue to rise, many were unable to foresee the fatal repercussions a crash in the housing market would cause. Once subprime loan delinquencies and foreclosures increased, some lenders were forced to buy back the bad loans from investment banks negatively impacting their earnings and stock prices (A Sub-Prime Primer, 2007). Furthermore, the value of mortgage back securities dropped substantially and combined with fewer buyers, investment banks experienced enormous losses on their security holdings, which they were forced to record. In
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