The Subprime Mortgage Meltdown

The Subprime Mortgage Meltdown

The purpose of this research study is to explore the causes and consequences of the subprime mortgage crisis and ways of preventing another crisis. The subprime mortgage crisis was an occurrence of unfortunate events that led to the U.S. recession in 2008. It was started with a rise in subprime mortgage foreclosures and delinquencies, which led to a decline of securities backed by mortgages. These attractive mortgage backed securities and collateralized debt obligations offered mind boggling rates of return, taking advantage of the high interest rates of 2007. Numerous institutions began to collapse in 2008, triggering an economic downward spiral. This crisis prompted massive media attention; many different explanations of the crisis have been suggested. Fingers have been pointed at financial institutions, regulators, credit agencies, government housing policies, and consumers. The crisis had severe and lasting consequences for the United States and other European economies. The mortgage crisis fueled a deep U.S. recession, with a loss of nearly 9 million jobs in 2008. U.S. housing prices declined 30% on average and the NYSE elevated. Economic growth remained below pre-crisis level. The causes and consequences of the subprime mortgage crisis and tips of preventing another crisis from occurring will be discussed in the remaining paragraphs.

The mortgage crisis can be credited to a number of factors, factors emerging over the past few years. Americans hear causes including the simple inability of homeowners to make their mortgage payments, overbuilding during the 80’s and 90’s, the distribution of risky mortgages, high personal debt levels, bad monetary and housing policies, or inappropriate government regulation. Subsectors of the finance industry were offering irrationally low interest rates and irrationally high levels of approval to subprime mortgage consumers to gain a competitive advantage. Consequently, homeowners were not capable of paying their mortgages causing their home to foreclose and become bank owned, losing thousands of dollars for each household. (Denning, 2011)

One of the initial and more obvious causes of the subprime mortgage was the bursting of the U.S. housing bubble. With appealing loan incentives, borrowers were encouraged to assume risky mortgages, in anticipation that they would be able to refinance at an easier time. Unfortunately not all went as planned, interest rates began to rise and housing prices started to drop across the country, leaving borrowers unable to refinance. The country began to see a tremendous increase in foreclosures, leaving many Americans in extreme debt. With housing prices falling, investors looking for mortgage-related securities plummeted. In July 2007, investment bank Bear Stearns announced that two of its hedge funds had collapsed. These were funds invested in securities that got their