Mortgage Crisis

Topics: Mortgage, Subprime lending, Subprime mortgage crisis Pages: 6 (1815 words) Published: November 24, 2008

In my research you will find that I outlined the cause and effect of the mortgage crisis. I also speak on the falling housing prices due to the mortgage crisis and the domino effect that will be created on and for the economy. I will also speak on the foreclosure rates caused by sub-prime loans and no fall back plan to help in the case of the mortgagor defaults.

The Mortgage Crisis

Thesis Statement:

The mortgage crisis that has caused house prices to fall and foreclosures to occur across the United States will create the need to alter the financial mortgage industry policies; as the impact it has can go as far as causing a consumer recession due to the low unemployment rate, rising consumer debt and increasing short term interest rates.


The current financial downgrade will affect credit card loans, home equity loans and prime mortgages causing a consumer recession. The house princess in 2007 fell by almost 6% and the figure is expected to rise another 15% in 2008. This combined with the unemployment rate which in December was at the highest level at 5% is projected to increase to 5.8% by the end of the year (Morrissey, 2008).

There are four major factors involved in the mortgage crisis. The starting point of the whole crisis was the false bubble created when lenders allowed sub-prime borrowers to secure loans without a fallback policy of what would happen in case of a default. Loans were given without proper regulations and borrowers were given amounts of their loans than would be considered “safe” by any financial analyst. Thus, when the economy started to decline and the real estate bubble increased, the number of foreclosures began to rise (Cuneo, 2008).

This began to cause the lenders to take a step back and tighten their lending policies-again without any back-up to allow the borrowers a safe zone. The lenders simply raised the interest rates. With the sub-prime borrowers unable to find any financing or easy financing, more foreclosures happened thus, causing major changes to take place in the credit market affecting the prime borrowers.


All this is working to create a domino effect throughout the mortgage and the US economy. Sub-prime borrowers who have experienced the foreclosures have had a personal and financial setback. Losing their credit rating reduced their purchase power and also their financial status as they strive to downsize with a low credit rating. This vicious cycle will make it hard to rent for those who are unemployed as they may be pushed into temporary or permanent poverty. The whole mortgage market is caught in a “web” made all the more critical due to the current state of the US economy however; the mortgage crisis is simply one side of the coin.

Subprime borrowers, with low rates of 7% to 8%, will see rates reset at numbers like 11%. Prime borrowers are seeing rates jump to 20% and more causing them to come near to defaulting on their loans (Morrissey, 2008). This increase in rates will create a domino effect altering most of the financial markets. Prime borrowers and those who have the need for mortgages will find that with the new lending rates and policies a mortgage is near impossible. Prime borrowers facing higher rates will go near to defaulting on their loans regardless of their financial stability. The economy as a whole is on a downslide. Most people renting will have to stay in their rented homes as they cannot afford the mortgages of the current economy in turn, stagnating the economy in its current crisis. Buyers are being cautious because foreclosures mean special assessments will be imposed on the areas raising cost of ownership (Opdyke, 2008). With prices so low there are buyers in the market but not enough to turn the picture around for the mortgage industry; the prices have not yet hit rock bottom and that is the fear, where will the bottom be?

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