What Is Subprime Crisis Subprime crisis, also regularly known as the mortgage meltdown is a financial crisis that occurred between the years 2008 to 2009. It is a result of excessive borrowing to numerous homebuyers who have poor credit scores. This act of lending is called subprime lending. During this period, loads of homebuyers defaulted on their monthly payments as their interest rates increased with time. With that, there was a sharp upsurge in mortgage foreclosures.
Bank of America and the Mortgage Crisis Sharply rising mortgage foreclosure rates during the economic recession between 2007 and 2009 have drawn a significant amount of attention from scholars and policy makers. There has been an abundance of research probing factors, particularly sub-prime lending and neighborhood characteristics, contributing to foreclosures (Li). The present paper, investigated causes of the mortgage disaster with relevance to Bank of America. Bank of America is one of the major financial institutions affected and is losing money in the industry. It is hypothesized that the bank and other financial institutions are still struggling in the industry, due to several reasons.
In the early 2000’s the housing market boomed, real estate was a hot investment and everyone was looking to buy a home. However not everyone can afford a home and a majority of people were forced to take out a mortgage to purchase real estate. During the housing boom banks were supplying subprime loans and upping the risk in the real estate market. These loans were not only risky but irresponsible on the part of the banks’ lending them, and although individuals receiving the loans thought they were being helped at the time, these loans were a major reason why so many people their homes, almost crippling toe U.S economy as a whole.
Based on this case study, it is clear that a plethora of reasons surrounding the U.S housing market led to the financial crisis, and consequently, the Great Recession of 2007. Most notable among the factors were subprime mortgage lending by mortgage lenders, poor risk management and investment choices by financial institutions and banks, and the ancillary agencies that were ready to transfer credit risk to other parties in order to make the most profit for themselves.
In order to solve the problems that America faces, a brief overview of their origin is necessary. Misplaced confidence in the continuous bright future of home prices and the attempts of lenders to profit in every way possible were major causes of the current crisis. Lenders often made mortgage contracts with little consideration for the ability of the recipient to repay. They were able to do this with little risk for themselves because these loans were bundled and sold off to investors. Furthermore, the demand for loans with more flexible standards was tolerated by the lenders because the lenders believed, just as those demanding the loans did, that the increase in home prices had no foreseeable end (Shiller 50). Many people saw an opportunity to make money off of subprime and adjustable-rate mortgages, and the fantasy of endless price increases overcame reasonable judgment.
Sub-Prime Mortgage: The Snowball Effect Intermediate Macroeconomics Sub-prime mortgages were a lucrative new market idea, pushed by the government, executed by the lending institutions, in order to provide everyone the American Dream. During the expanding economy, this dream became a reality—untested and unchecked—as low interest rates fueled the desire of investors to make dreams come true! Ultimately, the vicissitudes of the economy turned downward and the snowball effect began while financial sectors and investors scrambled to catch the falling knife. While history is being written this very day and hindsight is 20/20, we can reflect on the ideologies and policies that brought forth the worst economic downturn since the Great 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.
Only a few years ago, homes were selling at exorbitant prices. People were buying them and consistently moving upwardly as access to money didn’t seem to be a problem. All seemed well and good, as the economy was seen to be in a boom. But as some skeptics and critics forewarned, as every other time when inflation creeps into the system, the “bubble” can only stretch so far until it bursts.
The subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system. The collapse of the US housing market has had a devastating effect on the nation, where the housing price boom was particularly pronounced, and the subsequent decline has been particularly disastrous. Hundreds of thousands of working and middle class citizens are in danger of losing their homes. The U.S. Home Loan Bank Act launched the government into a long-range program to reform and strengthen the savings and loan institutions. The Home Owners Loan Act provided emergency relief to homeowners and to mortgage-lending institutions. Neither of these measures had been effective, however, in providing an adequate stimulus to residential construction. Nor had they provided a means for encouraging the flow of loans into residential building from other classes of lending institutions. In 1934, the administration and Congress turned their attention to the problem of stimulating employment in residential construction. The National Housing Act of 1934 authorized the establishment of a system of mortgage insurance under the Federal Housing Administration. To achieve its objective of stimulating employment, Federal insurance was authorized of short-term loans for home repair and improvement. This insurance was offered free on any loan made by any qualified lending institution for any hom...