The subprime crisis, more famously known as the ‘mortgage meltdown’, came to public awareness when the drastic increase in home foreclosures grew out of proportion within a year, causing a domestic financial crisis within the U.S. which spread around the world in 2007. Many suffered as spending power of consumers diminished, housing market plunged, foreclosure numbers raised and stock market shaken as effects of the crisis. This resulted in violent conflicts among consumers, lenders and legislators over the sources and probable solutions to ease this mess.
What caused the crisis and parties involved?
Real Estate Bubble (Home Buyers)
In the past, potential home buyers found it difficult to obtain mortgages if they had poor credit ratings, provided small down payments or sought high-payment loans. Unless protected by government insurance, lenders often denied such mortgage requests. While some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA), others, facing limited credit options, could only rent. During that time, homeownership fluctuated around 65 percent and mortgage foreclosure rates were low
Owning a home has always been a part of the 'American Dream'. It allows people to take pride in a property and engage in a community for the long term.
In the early 2000s, the conditions were right for people to achieve that dream. Mortgage interest rates were low, which allow homebuyers to borrow more money with a lower monthly payment. In addition, home prices increased dramatically, so buying a home seemed like a sure bet.
Casual Underwriting (Lenders and Banks)
Soon, high-risk mortgages became available from lenders who funded mortgages when banks purchase those mortgages and repackaging them together with low-risk and med-risk mortgage into pools (subprime mortgage) that were sold to investors in the form of private-label mortgage-backed securities (Collateral Debts Obligations aka CDO) on