In order to accurately solve the problem of the foreclosure crisis the nation is currently in, one must look at the cause of the issue. To determine the cause, the history of foreclosures has to be looked at. The questions, “How long have foreclosures been around? In the past what was the cause of foreclosures? How was the problem fixed before? What are the similarities between now and then?” all need to be answered.
The 2008 financial crisis led to a sharp increase in mortgage foreclosures primarily subprime leading to a collapse in several mortgage lenders. Recurrent foreclosures and the harms of subprime mortgages were caused by loose lending practices, housing bubble, low interest rates and extreme risk taking (Zandi, 2008). Additionally, expert analysis on the 2008 financial crisis assert that the cause was also due to erroneous monetary policy moves and poor housing policies. The federal government encouraged the expansion of risky mortgages to under-qualified borrowers. Congress pushed for the support of affordable housing through extended procurement of non-prime loans for applicants with low income (Zandi, 2008). The cutting down of interest rates to low levels to supplement for technology bubble of early twentieth century and the effects of Sept 11, a housing bubble was created. This move facilitated individuals with poor credit to obtain mortgages in high percentage when lenders created non-conventional mortgages by offering mortgages with extensive amortization periods, loans with interest and payment alternatives such as ARMs (Angelides et al, 2011). Ultimately, interest rates rose again and many subprime borrowers stopped paying for their mortgages when their interest rate were reset to higher monthly payments. This paper will discuss the impact of the financial crisis as a result of subprime mortgages.
Posing the problem of solving the foreclosure crisis first begs the question – “is there really a foreclosure crisis?”
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
In conclusion, the subprime crisis was historic economic crisis that the US and other European nations underwent. This kind of crisis can be avoided in future if the US government implements stringent policies guiding borrowing mortgage lenders and other private financial institutions (Rao, and Sisodiya, 34). The effects to both the consumers and the homeowners were severe and the overall result was the US recession. These economic situations can reoccur if the government and the private sector cannot embrace sound regulations and ensure they are implemented to the later.