Subprime Mortgage Crisis
January 19, 2015
Subprime Mortgage Crisis
Subprime mortgages are generally granted to borrowers who cannot obtain conventional mortgages due to insufficient or delinquent credit histories. These borrowers may be forced to take interest-only loan, which have lower monthly payment but are very difficult to pay off in the end. Problems with mortgage financing are the generally accepted cause of the financial meltdown that occurred between 2007 and 2008 (Gorton, 2009). The Subprime Mortgage Crisis, or "mortgage mess" or "mortgage meltdown," was caused by a precipitous rise in home foreclosures that started in 2006 and spiraled out of control in 2007 and 2008. The excessive use of subprime lending during the housing bubble caused an unprecedented foreclosure fallout, the effects of which caused credit markets as well as global and domestic stock markets to face a major financial crisis (Mayer, 2008). The goal of this paper is to address the subprime mortgage crisis, the effects prior to and after the crisis, and discuss who were the biggest players affected by this crisis. Finally, Team A will provide several concepts learned during the course of this class, which may help ensure that something similar does not happen again in the future. The Housing Market Before and After the Crisis
The housing market crash between 2006 and 2007 is considered the worst one in this country's history. Home ownership rates in the U.S. had risen from 64% to an all time high of 69.2% between 1994 and 2004 (Watkins, 2015). By the beginning of 2006, house prices had reached unsustainable levels. As a result, demand waned and prices fell dramatically by the end of 2006 and through 2007. Prior to the subprime mortgage crisis, the housing market was booming due in large part to new loan instruments advertised by mortgage brokers to make homeownership more affordable. Once prices on homes reached a peak and demand dropped, the housing bubble burst causing new homes sales and construction to waver. By 2012, home prices reached a brand new low, producing a new credit crisis that tends to be labeled as the primary cause of the recession experienced in the United States in recent years.
In 2013, The Economist Newspaper of London stated in an article that the American housing market was in recovery, but that home ownership was still rating very low (the lowest since the last quarter of 1995 according the Census Bureau) at 65.1%. With a current high demand for housing and low repossessions, there are fewer homes available to buy or rent in the market. Fewer rental homes are causing rental fees to go up. There is hope that because rental fees are so high today, people will once again be enticed to buy a home in order to make a better investment with their money. Other Affected Markets
The housing finance market was not the only one affected by the Subprime Mortgage Crisis. When the housing bubble burst in late 2006, it uncovered a broader problem in the larger global financial sector. The housing bubble that preceded the collapse of the subprime mortgage market was a direct result of domestic policies that changed the structure of the mortgage market from "risk-limited to a risk-loving one" (Immergluck, 2012). Traditional self-amortizing, 30-year fixed rate mortgages securitized by Government Sponsored Entities (GSE), FannieMae and FreddieMac, went into decline during that period. In sharp contrast, during the housing and debt boom of the 2000's nontraditional mortgages (NTM), such as non-amortizing balloon and interest-only mortgage products, as well as subprime loans experienced a substantial increase. Most of these NTM were securitized in the private-label securitization market. (Wachter, 2014). These "toxic assets" were bundled into new financial instruments based on subprime mortgage-backed collateralized debt obligations (CDO) (Longstaff, 2008), which were purchased by...
References: Anderson, J. and Timmons, H. (2007, Aug. 31). Why a U.S. subprime mortgage crisis is felt around the world. The New York Times. Retrieved on Jan. 18, 2015 from www.nytimes.com
Demyanyk, Y., & Van Hemert, O. (2011). Understanding the Subprime Mortgage Crisis. Review Of Financial Studies, 24(6), 1848-1880.
Gorton, G. 2009. Information, Liquidity, and the (Ongoing) Panic of 2007. American Economic Review Papers and Proceedings 99:567–72.
US housing. (2013, Aug 03). The Economist, 408, 77. Retrieved from http://search.proquest.com/docview/1417570448?accountid=458
Wachter, S. (2014). The market structure of securitization and the U.S. housing bubble. National Institute Economic Review, 230, pp. 34-44. doi: 10.1177/002795011423000104 Retrieved on Jan. 18, 2015 from http://ner.sagepub.com
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