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 …show more content…
that has been in upward trend until 2006 and so did the mortgage origination volume. Source: S&P Case-Shiller, Inside Mortgage Finance in Sanders (2008)
Further supported by The National Homeownership Strategy, which targeted banking industry to enhance the availability of affordable housing via creative financing (Whalen, 2008), mortgage brokers and lenders aggressively extended financings to the subprime borrowers without adequate risk assessments on borrowers’ credit ratings and leverage ratios. Incomplete and fraudulent loan application documentations thus, became a norm. Subprime borrowers generally refer to borrowers with lack of creditworthiness, insufficient base income and high credit dependency. Lenders therefore, imposed higher interest rates on mortgages extended to these high-risk borrowers, which eventually reduced their repayments capacity. At the same time, it was perceived by many lenders that housing prices would keep rising, hence, the collateral valuation too, thus probability of default was considered as low. The loans, which were priced using the Adjustable-Rate-Mortgages (ARM), basically offers low initial ‘teaser’ rates, which applies over a certain period and resets to higher rates upon expiration of the adjustment period (Gapper, 2007). The innovation was intended to allow access by the poor into the fold i.e. formal finance by enabling these borrowers to establish some credit profile with the bank, which would
The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.
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.
Interestingly, declining risk premiums encouraged lenders to consider higher-risk borrowers for loans. A Federal Reserve study indicates that there was a general decline in the difference between mortgage
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
Lenders began foreclosure proceedings on about 1.3 million properties in 2007 which increased to 2.3 million in 2008 (an increase of about 81% from 2007) - Wikipedia.
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
After the bursting of the United States housing bubble, many homeowners found themselves in a dire situation. Following the dot-com bubble burst, the Federal Reserve slashed interest rates, meaning credit was cheap. Lower lending standards also meant that consumers with not-so-great credit were suddenly able to attain adjustable rate mortgages with a minimum of money down and easy initial terms. In 2004, approaching the pinnacle of the housing market’s climb, former Federal Reserve Chairman, Alan Greenspan, actually encouraged Americans to take out adjustable rate mortgages. Then, as 2006 came, Americans saw the housing market reach its peak and subsequently plummet downward. As a result, it became difficult to impossible forthe borrowers
Approximately five million homes have been foreclosed since 2007 which, along with an untold amount of short sales, have caused an estimated $1 trillion in lost wealth in the United States. This crisis affected our minority populations and their communities to a larger extent with estimations of 17-20 out of every 1000 minority homeowners suffering foreclosure versus only 10 out of every 1000 Caucasian homeowners. This was due to targeting by the subprime mortgage companies specifically targeting African-American, Hispanic and Asian buyers with risky mortgages even when they could have qualified for prime loans. Also affected were many who lost their homes due to income loss due to the Great Recession which had its beginning in the subprime mortgage crisis. Many of those that have lost their homes during this crisis are interested in being homeowners again and this essay will cover some possible ways for all of these boomerang buyers to enter into the housing market again.
It is better to take out a 15-year mortgage instead of a 30-year mortgage because you will ultimately pay less, even though you pay more each month. A 30-year mortgage makes you pay more in total because of the interest. Your interest will not stop and you get more money added by the end of your 30-year mortgage. You can stack up almost 200,000 dollars more to pay from the 30-year mortgage than the 15-year mortgage. The 15-year mortgage lasts shorter but you do not have the interest for nearly as long. Interest can get to you because with it, you never pay back only the amount that you took out from the
As home prices continued to rise, lenders thought the borrowers would just default on the mortgage and then the lenders would just be able to sell the house for more cash. While prices and risks were rising, investors were notified by credit rating agencies that mortgage backed securities were safe investments by giving them AAA rating (Naude 3). These investors were told one thing and market investments were not showing high returns. Lenders started to create more and more investments because investors wanted to buy more securities, but in order to create more investments, lenders needed more mortgages (Erkens, Hung, & Matos 392). A way to create more mortgages was to widen their customer market. Lenders created less strict rules and regulations
The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play
Around 2006 the price of houses began to fall substantially fast. “The oversupply of houses and lack of buyers pushed the house prices down until they really plunged in the late 2006 and early 2007” (The Subprime Mortgage Crisis Explained). These actions threw investors into a big dilemma. In the beginning they believed buying the mortgages would bring them a profit, but quickly realized that the mortgages would cost them more financial damage than reselling the homes. “Nationwide, home vales have declined about 16% since the summer of 2006 and experts project that the drop will continue until homes have lost about 25% of their value” (Biroonak, 2008). In other words mortgage homes are “underwater”, that is, the mortgage owed equals or exceeds the value of the house (Biroonak, 2008). Investors and homeowners started to go more in debt trying to pay off their original debts.
The overarching problem of profiteering is the foundation of many of the moral problems that came from the exploitation of homeowners during the subprime loan scandal. In the financial industry, Lewis (2010) defines the awareness of top executives and bank loan officers that participated in giving out these loans, More so, an interview with Steve Eisman reaffirms the fully conscious role that loan officers played in allowing individuals without good credit ratings to take these loans. In many cases, the banking industry argued that it was the fault of those that took the loans, but it was actually the facilitation of these loans by loan officers that laid the unethical and immoral foundation of this scandal:
Due to such events as the subprime mortgage crisis, the auto market and Wall Street’s failure, the United States suffered a severe economic blow. Looking at the situation from an economic view, supply is supposed to equal demand. Due to the mortgage crisis and the careless attempts of some to make money, there is a superfluous amount of empty homes throughout the United States. In the subprime mortgage crisis, the nature of the failure was the inability to account for money given to individuals, who lack the appropriate requirements. In order to obtain a loan, collateral is needed. References were not being checked and poor credit history went ignored. People were obtaining loans and not paying attention to the interests rates associated. “This time around, the slack standards allowed millions of high-risk borrowers to get easy home mortgages. When this so-called subprime market collapsed beginning about a year ago, ordinary working people bore the brunt” (Gallagher, 2008). Companies were so anxious to place people in homes, that it cost them billions of dollars and
In 2007, many banks in US and Europe were hit by a collapse of the value of mortgage-backed securities. The investment