U.s. Subprime Mortgage Crisis

905 Words Apr 17th, 2015 4 Pages
The U.S. subprime mortgage crisis was a nationwide catastrophe that resulted in the increase of the default and foreclosure of home loans, and consequent decrease in the value of mortgage-backed securities. The mortgage crash was a result of non-bank originators being insufficiently regulated and engaging in excessive risk-taking behavior and questionable lending practices. However, the leading causes for the subprime mortgage extend further than flawed lending decisions. The subprime mortgage crisis would not have occurred had it not been for a series of fundamentally flawed government policies (Allen, 2015).
This paper will address the government policies in place that lead to the deterioration of lending standards, and the cycle being fueled by the practice of securitization, and thus resulting in the subprime mortgage crash.

The mortgage crisis could not have occurred had it not been for the defective government policies in place (Allen, 2015). Prior to the mortgage recession, the government had lowered the interest rates in order to try and stimulate the economy. This caused lenders to search for alternative ways to increase their profits and as an answer turned to high-yielding mortgage-backed securities; however, lenders did not have a clear understanding of the risk involved. The demand for the higher-yielding paper caused the process of mortgage bundling, where non-banks, who were financial institutions with insufficient federal regulation oversight, were…
Open Document