Today million are still jobless with an unemployment rate at 9.7%, credit is tight, and businesses are slowly building back up. The sub-prime financial crisis of 2007 and 2008 financially destroyed the lives of many, but how could this have happened?
So what is a sub-prime mortgage anyways? According to investopedia.com, a sub-prime mortgage is, “a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit rating, would not be able to qualify for conventional mortgages. Because sub-prime borrowers present a higher risk for lenders, sub-prime mortgages charge interest rates above the prime lending rate.”
Our credit rating is called our FICO score, which is simply a numerical value that through evaluation of our prior credit related purchases determines our credit risk or possibility of default. This process of generating scores was through the use of computer technology, which has enabled financial institution and other lenders, a more cost-effective process to determine who should be given a loan.
Stepping back for a moment, we should understand that a mortgage is a loan given to households or businesses for the purpose of purchasing a home, land, or other structures. That property is used as collateral for the loan if the borrower should default.
In addition, we should understand risk and the underlying ways that we need to expect to see to occur. As we know, anytime we give an individual the benefit of the doubt that their word will be upheld a degree of risk involved. What’s more is that all information is not always available equally to all parties involved this is called asymmetrical information. This lack of information on the behalf of the lender inc...
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...ion foreclosures in such a short period the financial market was in jeopardy, banks began to go bankrupt, driving interest rates higher and higher putting even greater pressure on the American household and businesses. Today we are still dealing with the after math of the crash of the housing market. Many people are without jobs and homes. Our economy is strained, yet there is hope for recovery. As we rebuild I hope that all involved have learned from this and realized all of the lives that have been affected.
Works Cited
Latest Numbers. Department of Labor. http://www.dol.gov/. Retrieved June 20, 2010
Mishkin, Frederic S. The Economics of Money, Banking, & Financial Markets. 9th Edition. Addison Wesley. Print.
What is a sub-prime mortgage, Investopedia. com. http://www.investopedia.com/ask/answers/07/subprime-mortgage.asp. Retrieved June 16, 2010
Just as the great depression, a booming economy had been experienced before the global financial crisis. The economy was growing at a faster rtae bwteen 2001 and 2007 than in any other period in the last 30 years (wade 2008 p23). An vast amount of subprime mortgages were the backbone to the financial collapse, among several other underlying issues. As with the great depression, there would be a number of factors that caused such a devastating economic
A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho...
In “The Big Short”, this movie about the economic collapse of 2008 in America highlights how Americans of all racial backgrounds were hit hard when the housing market collapsed. The film provides a very compelling argument and describes how the market crashed because banks began to give out more unstable loans out to people in order to sell more properties, which eventually led to the housing market to be built upon millions of risky loans. This practice grew until the housing market became too unstable because of all the risky loans and resulted in an economic crash. The housing market collapse led to millions of Americans to lose their homes because of foreclosures and led to massive amount of homelessness and unemployment since the Great
The cause of this was the Stock Market crash in 1929. Many investors in the stock market panicked and sold all their stocks. The results of this include frightened Americans withdrawing all their savings, causing and hoarding it in their homes, many banks to shut down and less money to circulate in the economy. Although the economy had taken a dramatic blow, there was hope. A new program was administered by the government to help people suffering from the depression.
It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market.
Between January 2008 and February 2010, employment fell by 8.8 million, the largest decline in American history. The 2008 Recession, which officially lasted from December 2007 to June 2009, began with the bursting of an 8 trillion dollar housing bubble. Job losses during the recession meant that family incomes dropped, poverty rose, and people all over the country were suffering. Things like this don’t just happen. Policy changes incorporated with the economy are often a major factor. In this case, all roads lead to one major problem: Deregulation. Deregulation originating from the Carter and Regan Administrations, combined with a decrease in consumer spending, and the subprime mortgage bubble all led up to the major recession of 2008.
Your credit score is one of your most important financial attributes. Fortunately for those who are unsatisfied with their credit rating, there are plenty of options available. Improving your score is an attainable goal that everyone should aim for, even those who are content with their credit rating.
The ordinary people affected by the crisis experienced many forms of mass unemployment. As the workforce began to panic the anxiety grew stronger. The stress of unemployment and anxiousness forced thus individuals to look to the government for the answers. Governments quickly responded to the anxiety by raising taxes. Which in turn only seemed to make matters worse. The United States attempts at restoring the nation with confidence failed. Some believe that the main reason being that the United States had developed an enormous economy of mass production, but the larger picture consisted of analyzing more than the mass production. Instead there was a problem arising. How would the nation survive with a population of mass production and a decrease in consumption became the main question being analyzed. As the stock market crashed and the United States economy began to as well the U.S. government began to focus on the idea of every nation for themselves.
Many people bought houses, but then the stock market crashed in 1929, and it happened overnight, and it didn't end there either. After it crashed it continued to decrease due to investors still attempting to trade, causing the stock market to go further into a depression. After the crash, Wall Street went into a panic and continued to trade more, wiping out 13 million clients (A&E networks). Some people were able to withdraw their money from the stock market before things got too bad, but the majority of the American population lost their money and went bankrupt. Many people blamed President Hoover for the depression because he refused to help and believed the government should not be responsible for the stock market crash.
I guess most of you’ve heard the words Subprime Crisis again and again on TV when you were a middle school student 6 years ago. You may not know what it was when you were a child.
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.
The subprime mortgage crisis is an ongoing event that is affecting buyers who purchased homes in the early 2000s. The term subprime mortgage refers to the many home loans taken out during a housing bubble occurring on the US coast, from 2000-2005. Home loans were given at a subprime rate, and have now led to extensive foreclosures on home loans, and people having to leave their homes because they can not afford the payments. The cause and effect of this crisis can be broken down into five major reasons. When subprime mortgages began to flourish, the term housing bubble came into existence.
Subprime loans are ethical but misused in a way that created ethical issues. Subprime loans are loans made to borrowers, generally people who would not qualify for traditional loans, at a rate higher than the prime rate depending on factors like credit score, down payment, debt-to-income ratio, and payment delinquencies (Ferrell, O., Fraedrich, & Ferrell, L., 2010). Subprime loans help consumers get mortgage loans that do not qualify for a conventional mortgage loan product.
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.