Subprime Mortgage Crisis

Subprime Mortgage Crisis

The subprime mortgage crisis is foreclosures of the U.S housing market which began in late 2006 until present day. Prior to 2006, the housing market seemed to be going up for long time. Noticing this trend, borrowers think that everything was fine and refinancing will solve any future problems. In 2006-2007, the housing market moderately cooled down. Many unable to refinance because of higher interest rate of Adjustable Rate Mortgages (ARM), found themselves in a deep bind. Massive defaults and foreclosures soon followed.

By definition subprime mortgage is giving loans to borrowers who typically are not qualified because of their higher risks: income level, work status, and credit history. This also puts the borrowers into a higher rate category than the prime rate. In March 2007, the U.S value subprime mortgage is about $1.3 trillion; $7.5 million of that is bad.

There are many contributing factors that cause the subprime mortgage crisis: slump of the housing market, role of borrowers, role of financial institutions, etc. The most visible of them all is the housing market crisis. Unable to pay mortgages, millions of borrowers’ houses face repossession. Part of the cause of the housing crisis is consumerism. Elevated by yours truly, President George W. Bush who ask American to spend more to get out of economic slowdown. Another problem includes over building during economic boom period, this creates surplus supply that many homeowners are not willing to sell at a lower market prices.

High-risk borrowers ability to obtained easy credit and speculation of rising housing market, fueled the housing boom. Some compelled to resort into fraud. 1,411% increase of fraudulent behavior reported by the U.S Department of Treasury between the years of 1997 to 2005.

Financial institutions are also to blame for the crisis. Eager to grow their industry in the name of profits, they were willing to provide high-risk loan options and incentives. Options created such as the Adjustable Rate Mortgages (ARM), where one can forgo principal and pay only interest during the first period of lending. Another called Payment option, gives homeowners the ability to pay a random amount for the first period and any interest left over is added to the principal. Incentives such as the “teaser” rates that offered below 4% also fueled the moral hazard