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.
At the birth of the sub-prime mortgage market, investors and lending institutions had found a way for more families to live the American Dream while they were able to profit. The economy was booming, the unemployment rate was low, and the demand for housing was high due to low interest rates. The idea was that lenders were willing to accept more risk by financing homes with less equity to those that were not creditworthy. The incentive to the lender was a higher interest rate to the consumer, while expecting a higher foreclosure rate. Due to the high demand for housing, assets were also appreciating decreasing the implied risk. Add in the origination fees, suddenly the entire proposition became very profitable. In theory, the market assumed an annual foreclosure rate of 8% with the average loss due to foreclosure being 30%. Over a $1.2 trillion market pool, the predicted foreclosures would only cost a mere 2.4% implied loss from gross revenues. If the subprime homeowner’s a...
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...e leaders and thorough oversight, our economy should bounce back with another painful lesson learned.
References
Petroff, Eric. “Who is to Blame for the Subprime Crisis?” 2007. Investopedia. October 5, 2008. http://investopedia.com/printable.asp?a=/articles/07/subprime-blame.asp
Amerman, Daniel. “The Subprime Crisis is Just Starting.” March 20, 2008. Financial Sense University. October 5, 2008. http://www.financialsense.com/fsu/editorials/amerman/2008/0320.html
Bajaj, Vikas and Story, Louise. “Mortgage Crisis Spreads Past Subprime Loans.” February 12, 2008. The New York Times. October 5, 2008. http://www.nytimes.com/2008/02/12/business/12credit.html?_r=1&pagewanted=print
Barnes, Ryan. “The Fuel that Fed the Subprime Meltdown.” 2007. Investopedia. October 5, 2008. http://investopedia.com/printable.asp?a=/articles/07/subprime-overview.asp
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 midst of the current economic downturn, dubbed the “Great Recession”, it is natural to look for one, singular entity or person to blame. Managers of large banks, professional investors and federal regulators have all been named as potential creators of the recession, with varying degrees of guilt. No matter who is to blame, the fallout from the mistakes that were made that led to the current crisis is clear. According to the Bureau of Labor Statistics, the current unemployment rate is 9.7%, with 9.3 million Americans out of work (Bureau of Labor Statistics). Compared to a normal economic rate of two or three percent, it is clear that the decisions of one group of people have had a profound affect on the lives of millions of Americans. The real blame for this crisis rests on the heads of the managers that attempted to play the financial system through securitization, and forced the American government to “bail out” their companies with taxpayer money. These managers, specifically the managers of AIG and Citigroup, should be subject to extreme pay caps for the length of time that the American taxpayer holds majority holdings in their companies, as a punitive punishment for causing the Great Recession.
In Bernard Malamud’s, The Natural, the American Dream traps many people in a never ending cycle of failure. This is seen when Roy is shot by Harriet in a hotel room after he tells her he will be the best in the game despite that she points a gun at his head. Secondly, when Roy and Gus are making bets, Roy keeps betting despite losing every time, showing his false sense of hope that traps in a cycle of failure. Finally, Roy’s desire to be with Memo finally corrupts him thus causing him to ruin his dreams to be the best in baseball and when he regains hope that he can win the game, it does not happen. The American Dream causes insatiable hunger and results in a never ending cycle of failure because Roy has a false sense of hope causing him to make the same mistakes multiple times.
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.
"Subprime Mortgage Crisis - A Detailed Essay on an Important Event in the History of the Federal Reserve." Subprime Mortgage Crisis - A Detailed Essay on an Important Event in the History of the Federal Reserve. N.p., n.d. Web. 04 May 2014.
Cabral, R. (2013). A perspective on the symptoms and causes of the financial crisis. Journal of Banking & Finance, 37, 103-117
But economically, Roosevelt and his “brains trust” had no idea what they were doing. They attempted one failed intervention after another. The Great Depression was a disaster, and sadly an avoidable one.” (Edwards, 2005)
America is seen as the land of opportunity in that there are endless possibilities for an individual. In this land of opportunity, Americans strive to obtain the ideal known as the American dream. The American Dream is seen as the accomplishment of an ambition achieved while challenged by adversity.1 Americans often associate this success with the ownership of a home. The home is not simply a place of basic protection; there is a much deeper connection to the individual. Ownership of a home grants freedom and security that establishes a sense permanency for the individual. In contrast, renting a living space possesses a semblance of instability and dependence.2 The desire to improve ones’ position in life inspires one to obtain the American dream.
The American Dream is referred to by many people as the reason to come to America. It is, or so they say, the pursuit of life, liberty, and happiness. Unfortunately they are incorrect, there truly is no American Dream, it is all an illusion given to us by our founding fathers as a reason for the inequality in which people are treated. I have lived in this country for 16 years now and have all the patriotic bullshit about how we give everyone equal opportunity and how everyone is equal in the eyes of the law. I just laugh when I read this. Throughout our country’s 300-year history, it is all about raising one person over the other. It started with the movement of the Native Americans. They were here before anyone else, and they were moved because they did not live with all the violence our ancestors did. The founding fathers continued to push them further and further away because it was beneficial to them at the time. They said if you stay here we will not bother you anymore, then when they decided that area was nice and they needed it for the white man. Then we began to take the black man out of Africa and use them on our plantations so the white man could get more money. The President ended slavery, but there were ways around it and everyone knew it. No one ever said any persecution of the black man is wrong for years and why not, because it was more convenient for us to ignore it. Now the people from Latin American countries have come in homes of freedom, and better lives. We tell them they have to speak English, since they are in America, but I do not recall being taught the language of the Native Americans. Since they were here first should you not have to learn that language?
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. The home loans were given at a subprime rate, and have now lead to extensive foreclosures on home loans, and people having to leave their homes because they can not afford the payments. (Chote) The cause and effect of this crisis can be broken down into five major reasons.
...ment has to invest in the future of the country regardless of the deficit it may cause now, because the reimbursement in the future is priceless. An educated, trained and sustainable nation is something that no one can defeat even in times of crisis.
Irish people will never forget the financial crisis of 2008 in Ireland. A lax regime that let bankers be reckless, an over-dependence on the construction industry and little regulation harmed Irelands economy greatly. However, it is important that Ireland learns from its self-inflicted mistakes and re-builds its institutions. The economy has shown signs that it is improving and Ireland completed its EU-IMF bailout in December 2013.
...nces discussed above. Right now, the global economic is recovering, but the study of reasons of the crisis still teaches many countries a lesson on how to build a solid financial system and how to deal with other macroeconomic problems.