The Subprime Loan Blog Assignment And References Of Resources Researched Essay

The financial collapse of 2008 devastated many families and caused many people to lose their jobs and homes. It became the worst financial crisis since the Great Depression of the 1930s. The financial collapse began in 2007 when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and then to financial markets overseas (Encyclopedia Britannica 1). The Securitization Food Chain is what sent the mortgage business into a downward spiral causing thousands to foreclose on their home and many even needing to file bankruptcy. When giving out high mortgage loans to middle or lower class families they are being set up to have future financial issues when their payment rate increases. The Securitization Food Chain had a major influence on the Financial Crisis.

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

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.

June 13, 2007 is the day that Richard C. Cook claims in his article, “It’s Official: The Crash of the U.S. Economy Has Begun.” In the past couple of years, months, and weeks, the United States economy and stock market showed significant failures and inefficiencies to the world. Perhaps the greatest evidence signaling the recent economic meltdown is the subprime mortgage problems that started a little over a year ago. The burst of the U.S. housing market bubble was caused by a combination of risky lending and borrowing practices and higher interest rates coupled with dropping housing prices, making refinancing more difficult. To deepen the drama, Wall Street’s excessive debt and unsustainable

Financial institutions did little stop subprime lending, the popularity of these types of loans kept growing, and lending companies took quantity of loans over quality which added to the so called “housing bubble” (Burry, 2010). Financial institutions didn’t

The problem to be investigated is the ethics and effects of subprime loans on the financial institutions, borrowers and stakeholders. The subprime market was created to provide borrowers with a FICO score below 570 access to home loans. Inopportunely these loans were a major financial risk as most of the borrowers did not have the long-term income to pay for the high interest rate loans. (Jennings, 2012)

In 2008, one of the biggest financial recessions of our time occurred. The blame that should be placed on the unexpected crash of the housing market should come from the shady business strategies used by banks and investment agencies, which caused millions of everyday people to lose their jobs and homes. The role of subprime mortgages, CDO’s, and illicit ratings caused the biggest financial crisis since the Great Depression. The culmination of these things led to the downfall of the economy and start of a recession.

Investors relished in these mortgage backed securities. They paid a higher rate of return than investors could get in other places, and appeared to be safe bets. Home prices increased; Leading lenders to believe the worst case scenario, homeowners would default on their mortgage, and they could sell the house for an additional amount of money. 1 At the same time, credit rating agencies continued to inform investors that mortgage backed-securities were safe investments. Investors were desperate to gain more securities. Promoting lenders to help create more of them. However, to create more, lenders needed more mortgages. This caused lenders to loosen their standards and provided loans to individuals with low income and poor credit. These are referred to as subprime mortgages.2 Eventually, some institutions begin using what is referred to as predatory ending practices to generate mortgages. They made loans without verifying income and offered absurd, adjustable rate mortgages with payments individuals could afford, at first, it became disorderly quickly. Subprime leading was a new practice at the time. These investments were becoming increasingly less safe. However, investors trusted rating, and continued to

Sub-prime mortgages were a lucrative new market idea, pushed by the government, executed by the lending institutions, in order to provide everyone the American Dream. During the expanding economy, this dream became a reality—untested and unchecked—as low interest rates fueled the desire of investors to make dreams come true! Ultimately, the vicissitudes of the economy turned downward and the snowball effect began while financial sectors and investors scrambled to catch the falling knife. While history is being written this very day and hindsight is 20/20, we can reflect on the ideologies and policies that brought forth the worst economic downturn since the Great

A generation ago, lenders held onto mortgage loans until they were repaid, and retained a relationship with the borrower and an interest in their financial wellbeing. That changed considerably at the start of the 21st century. The modern, high-risk mortgage market gained its first head of steam in the 1990s, and its origin lies primarily in a string of deregulatory policy decisions over the last three decades. High-risk lending passed through two boom periods, the first one in the late 1990’s as well as the larger, second one in the 2000’s. The first boom was marked by a surge in subprime refinance lending. The second included both subprime home purchase loans and refinance loans and they grew rapidly after 2001 (Marcuse, 2009, p.351). Together a new class of alternative or

Subprime loans are ethical tools which were wildly misused during the time leading up to the financial crisis in 2008-2009. Subprime lending targeted borrowers who would typically not qualify for standard loans for various reasons. These included low credit scores, low income, and history of late payments. The loans were offered at a rate higher than the market rate due to the increased risks of the borrowers. Many of the clients Countrywide supported were much less likely to be able to pay off their loans compared to traditional borrowers. In the years leading up to the financial crisis, the real estate industry was flourishing which encouraged even clients who could not afford fancy houses to use subprime loans to finance their homes.

Since 2006, the number of foreclosures in the housing market has sparked dramatically. This is due to the fact that banks have given out subprime mortgages or interest-only loans to consumers regardless of their credit score. One of the main reasons why banks did not care about consumers’ credit history is because they resold the loans as mortgage-backed securities. This caused the loans to fall into the hands of credit rating companies that rated the loans too positive; thus, these assets were expanded and helped lead to the foreclosure crisis without hurting the banks directly. The goal was that banks lustily sought the big payoff that these mortgages could provide. The mortgages and loans let low-income consumers pay only a low rate of

The first and more important factor that lead to the subprime mortgage crisis was governments creation of Freddie and Fannie. This move by the government to intercede the private financial industry sector eventually lead to the US government being the largest lender of mortgages in the US. In addition to the flawed notion that government should determine who and how a borrow qualifies for mortgage loan is disconcerting in and of itself, but this also marked a fundamental change in banks models of originate and hold

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