U.s. Subprime Mortgage Crisis

1702 Words Jan 11th, 2015 7 Pages
The U.S. subprime mortgage crisis was a catastrophe affecting both real and financial sectors of the global economy. It was estimated that 2.5 million borrowers had lost their homes due to foreclosures from 2007 to 2009 and whilst another 5.7 million homeowners were at pending risk of foreclosure in the aftermath of the crisis (Williams, 2012). The failures and bailed out of large banking and financial institutions in the US, the UK, Europe and others such as Bear Sterns, Lehman Brothers, Northern Rock, AIG, Freddie Mac, Fannie Mae and etc. including the major collapsed of Iceland’s systemic banking, characterised as one of the largest experienced by any country in economic history, is an emblematic of the excessive and imprudent lending and securitisation activities (Youtube - Global Financial Meltdown, 2012). The underlying of the crisis stems from two factors - (i) boom in US real estate market powered by innovations in mortgage financing and; (ii) surplus liquidity in the global financial markets fuelled by accommodative monetary policy (Ackermann, 2008). In addition, laxed underwriting standards, lenders’ aggressiveness for profit maximisation regardless of the risks associated with the lending, overoptimistic assumption of the growth in real estate market and risk shifting opportunities by the banks in Wall Street to investors through securitisation of the subprime mortgages, further contributed to the calamity.

Subprime mortgages
Figure 1 below depicts the national…
Open Document