Introduction The Sub-Prime Mortgage Crisis of 2008 has been the largest financial crisis to take place since the end of the Great Depression. It was the actions of individuals and companies that caused this crisis. For although it could have been adverted, too much money was being made by too many people in place of authority to think deeply on the situation. As such, by the time actions were taken to attempt to rectify the situation, it was already too late. Trillions of dollar of tax payers’ money was spent trying to repair the situation that was caused by the breakdown of ethics and accountability in the private sector. And despite the government’s actions to attempt to contain the crisis, hundreds of thousands lives were negatively affected before, during, and after this crisis. The Warning Signs Although the crisis came to head in 2008, there were people who had realized that trouble was coming for years. The largest warning sign was the amount of credit in the market place. Many of the big companies and banks had very little capital, and the lack of capital was brought on by the housing bubble. Companies were lending too much money to people who could not pay them back. And even before people started to default on their mortgages, people could see that this was a problem. During a meeting with the Senate Committee on Banking, Housing, and Urban Affairs in January 2007 the staff of the Federal Reserve admitted “that they were aware of [the] problem in the housing issue three years earlier” (Dodd). And they were not the only ones. As far back as 2001 there were people who saw the danger that sub-prime mortgages were and who were trying to have bills passed to stop the bad lending that was going on, but no one wanted to list... ... middle of paper ... ... is that there are now much stronger standards in place to stop unaffordable lending from taking place. The economy has improved greatly since 2008. Credit is flowing at a safe rate and the unemployment rate is down to 7.4%. Housing prices are also rising again. The economy is not back to where it was in 2007, but it is improving every day. Conclusion The Sub-Prime Mortgages Crisis has had a great effect on the economy. It was a manmade crisis and it could have been avoided. Lack of ethics played a large role in the creation of this crisis as they were the root of most of the causes. By making unaffordable lending illegal and by lending banks money so they are willing to give people affordable credit to spend, the government has helped to stimulate the economy. And while there is still a long was to go on improving the economy, it is nowhere near as bad as it was.
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
Mortgage loans are a substantial form of revenue for the financial industry. Mortgage loans generate billions of dollars in the financial industry. It is no secret that companies have the ability to make a lot of money by offering a variety of mortgage loan products. The problem was not mortgage loans but that mortgage companies were using unethical behavior to get consumer mortgage loans approved. Unfortunately, the Countrywide Financial case was not an isolated case. Many top name mortgage companies have been guilty of unethical behavior. Just as the American housing market was starting to recover from its worst battering since the Great Depression, a new scandal, an epidemic of flawed or fraudulent mortgage documents, threatens to send not just the housing market but the entire economy back into a tailspin (Nation, 2010).
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.
dropped 10.9% causing the home market to suffer. Individuals who have subprime mortgagees to finance these less expensive homes are often times forced into foreclosure due to substantial rate changes. In affect, the economy faces acontinuing negative cycle of subprime delinquencies that result in tighter credit and lower home prices.17 A worsening of the American housing market will negatively affect the consumers confidence while at the same time worsening the American economy.18
subprime mortgages were major factors of the collapse of the 2007-2009 economy collapse. All of America suffered from the 2008 recession.
Individuals like the two young and rambunctious mortgage consultants portrayed in the film gave loans to anyone and everyone that could sign the paper, regardless of the recipient’s ability to pay the loan in full. It is doubtful that all consultants fully understood the ramifications of their actions, but undoubtedly the overall disregard for consequence was the start of the collapse. Mortgage consultants mislead and tricked people into loans they could never afford by playing on their desire to live the American dream. Distributing adjustable rate loans to individuals without jobs, without collateral is unconscionable. Unfortunately, from their perspective they were helping these individuals. In a twisted way, these consultants were acting ethically from a utilitarian point of view. The consultants won because they received utility in the form of a bonus for distributing the loans, and the loanee won because they could now afford the home of their dreams. What the consultants didn’t consider in their calculations were the long term results and utility of their actions, unethically building the flawed foundation of the housing
June 13, 2007 is the day that Richard C. Cook claims in his article, “It’s Official: The Crash of the U.S. Economy Has Begun.” In the past couple of years, months, and weeks, the United States economy and stock market showed significant failures and inefficiencies to the world. Perhaps the greatest evidence signaling the recent economic meltdown is the subprime mortgage problems that started a little over a year ago. The burst of the U.S. housing market bubble was caused by a combination of risky lending and borrowing practices and higher interest rates coupled with dropping housing prices, making refinancing more difficult. To deepen the drama, Wall Street’s excessive debt and unsustainable practices became more and more transparent. There was and still is tremendous turmoil amongst the Wall Street mammoths and the drama is certainly no longer entertaining or cheap.
During the boom years from the mid 90’s to 2006 in the U.S. housing market experienced a boom. During this period many mortgages were offered to people who were in the high risk category of defaulting. This was very relevant in the investments bankers took, including in the profile of mortgages they gave out. The culture that evolved was get as many mortgages on the books as possible, even if the recipient of the mortgage was not a sound investment and in many cases had not the wages to cover the mortgages they received from the banking institutions. Ridiculous coverage of 100% mortgages was being issued to folks who could never ever pay back the loan. These customers did not have to go through the normal credit checks, these loans became known as subprime loans. These high risk mortgages were processed as securitisation; this is a financial practice of combining mortgages into one large pool. Most of the pools became mortgage – backed security (MBS) and were traded on the financial markets by firms such as Fannie Mae and Freddie Mac. These MBS delivered high rate of return for the traders increasing their bonus but were not sound investments for the bank. This careless disregard of the compan...
With the emergence of the subprime meltdown, the United States economy was beginning to spiral into a recession in 2007. A downturn in the U.S. housing market turned into a global financial crisis. The downturn appeared in the middle of 2007 and the effects were felt in September of 2008. As indicated by Sharma (2009), “the months of August and September 2008 will be long remembered as the economic tsunami on Wall Street” (p.171). The mortgage finance industry collapsed and several government backed enterprises were in over their heads with massive amounts of defaulted loans. The subprime mortgage issue turned into an economic nightmare for the entire globe. Many backed mortgages were with overseas investor hoping to capitalize on the fast growing mortgage indu...
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.
The Federal Reserve failed again to adequately prevent another recession from happening, in 2008 2.6 million people lost their jobs and millions of American homes were foreclosed. In 2009 when the financial crisis was declared over, there were more than 4 million people unemployed, GDP growth has been slower than ever, and the housing market has remained sluggish. In 1999, The Federal National Mortgage Association (Freddie Mae) began to make subprime mortgage loans easier for people who did not have the savings to buy new homes. In 2004 consumer debt reached $2 Trillion for the first time, high levels of consumer debt is not beneficial for an economy because it can lead to bankruptcy. Business Insider’s John Carney wrote, “Americans were told that in order to prevent another Great Depression, the government had no choice but to implement the same policies that failed to lift the country out of the actual Great Depression”. By 2007 it became clear that the housing market was going down and by 2008 the government bailed out a list of banks and companies that should have went bankrupt. Once again, the Federal Reserve Bank failed to accurately prevent another financial crisis and only served to benefit a few bankers, politicians and their friends at the expense of the rest of
First off the United States economy, in general, needs to improve. Economy is like a domino effect, and now it is hitting the housing industry. Our unemployment rate is up to about 10%. Banks are not prospering like in the past. Tons of Americans are in debt; by the end of 2008 Americans reached a $972.73 billion debt due to credit cards.
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.
Usually what persists is that’s how big money gets even bigger. The Federal Reserve staved off recession back in 2001 by slashing federal funds rate by six point five percent to as low as one percent in 2003. This in return caused jobless people who wanted to buy homes, got a chance with mortgages so low. This in return became a gold rush to lenders, who offer loans to people, and then sold it to debt collectors. “More home loans, more home buyers, more appreciation in home prices. It wasn 't long before things started to move just as the cheap money wanted them to.” (Investopedia). As this went along, the government started raising the interest rates of the home, gave turmoil to the home owners who still didn’t have enough to pay it off initially. Ownership peaked at seventy percent and which led to the forty percent decline in home prices. Many of the borrowers again couldn’t afford the high interest rates and started defaulting. “This caused 2007 to start with bad news from multiple sources. Every month, one subprime lender or another was filing for bankruptcy” (Investopedia). In 2008 the National Economic Stabilization Act of 2008 which made Seven hundred billion to purchase assets. This marks that we as a nation couldn’t handle what the lenders had done, but no one was accountable