The Housing Boom

674 Words2 Pages

Introduction 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. The Risks of the Housing Boom Whenever an investment is made there is risk that accompanies it, the higher the risk of the investment, the higher the expected return. The same is true with the real estate market, and the mortgages banks issue. Each loan a bank gives out to a customers is an investment. To a prime borrower banks could loan them money at a stable, fairly low interest rate because these borrowers have a low risk of defaulting. However during the real estate boom banks were able to lend a large amount of subprime mortgages, mortgagees given to less than prime borrowers, with an inflated interest rate to make up the risk of these borrowers defaulting. “Overall, the subprime market was $600 billion in 2006, 20 percent of the $3 trillion mortgage market, according to Inside Mortgage Finance. In 2001, subprime loans made ups just 5.6 percent of mortgage dollars.” (Kratz, 2007) Banks were lending out to subprime borrowers at a lower teaser rate, giving borrowers an affordable payment because the interest rate was held artificially low until the teaser rate period was ov... ... middle of paper ... ...isk there would be no such thing as a subprime loans, any mortgage issued banks would be guaranteed a payback in full of their loan. However there will always be risk with investment and mortgages, and as always the higher the risk the higher the payout, but if institutions are not responsible in weighing the risk, and taking the right amount of risk a lot can go wrong as it did in 2008. Many institutions can be held accountable for the housing crisis in 2008, whether it be the banks for lending risky subprime loans, borrowers for risking their house on future assumptions like a higher pay right or their home appreciation, or investors buying mortgaged backed securities without researching what exactly comprised these securities. The housing crisis shows that everyone takes a risk when it comes to investing and everyone may pay the consequences of risking too much.

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