Sub-Crime Crisis

Why Subprime Mortgage?

Subprime mortgages are often associated with borrowers who have a tainted or limited credit history. This is because a subprime mortgage can offer the consumer a way to buy a home while they repair or build their credit history. As subprime mortgages carry substantially higher interest rates than normal mortgages available in the prime mortgage market, a subprime mortgage borrower has a great deal of incentive to repair or establish his or her credit to be able to refinance the subprime mortgage into a prime mortgage.

What is Subprime Crisis and the Causes of the Crisis?

Subprime Crisis, in other words, a mortgage crisis as a result of exceed borrowing and flawed financial products, mainly based on the assumption that home prices will only go up.

Happened in 2008, it impacted many countries around the world. Owning a home, as part of the American Dream, makes people proud of owning a property. However, it costs much to buy a home so majorities have to borrow money for that. In the early years, the mortgage interest rates were low so it allowed borrowers to get the money at low monthly payments. On the other hand, the home prices were increasing dramatically during those years. It was like a sure-win bet for both lenders and borrowers. However, housing prices rose beyond the general inflation rate were not sustainable in the long term. Between 1997 and 2006 (the peak time of the housing bubble), the pricing of the typical American house increased by 124% according to the research. This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out second mortgages secured by the price appreciation. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. The mortgage crisis began as demanding was less so there were less home buyers. Home prices stopped increasing at the breakneck speed. Borrowers who exceed invested properties than they could afford stopped paying the mortgage. Monthly payments increased on adjustable rate mortgages as interest rates rose. It was too late when those homeowners started to work out a way so they could continue on the mortgage payment. They just couldn’t turn back anymore. And for the financial institutions, they are at the same time going to lose their money that they invested because the borrowers are not able to pay the mortgage payment. In addition, banks have a very big problem as well because they rely on these financial institutions to invest in the pool of mortgages investment product. Financial institutions no longer wants to invest and do not trust the bank anymore. If no one wants to buy them, bank will not be able to get the money and offer the loans.

The banks also suffered from the lost for those borrowers who failed to make monthly payment.