The Subrpime Mortgage Crisis and Its Aftermath

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Subprime Mortgage Crisis

        The subprime mortgage crisis of 2007 – 2009 was a systemic banking crisis arising from mortgage delinquencies across the country.  The crisis coincided with the great recession of 2008 and in many ways spurred much of the finical turmoil of the last decade.  While the crisis may be initially linked to the bursting of the housing bubble in 2007, the major causes of the crisis arise from unsound lending practices, government policies, and credit agencies.

Mock Time Line:

Pre-Crisis

• Consumer mentality/ American home buyer housing boom 1997
• MBS/Adjustable rate mortgages
• Credit Rating practices
• Government Policies

2007 - 2008

• Housing Bubble burst what happened why
• Systemic effects on banks and financial institutions both national and global

Aftermath & Recovery

• Lehman brothers
• AIG
• The beginning of the recession and response

Pre-crisis Build Up:

Consumer Mentality

The crisis has been described as arising from several key triggers that stressed deteriorated many vulnerabilities in the financial system.  The standards of the consumer finical institutions, credit agencies and government was a product of the times.  The early part of the last decade was a time of exceptional growth.  Consumers were attracted the rising housing market with easy access to credit and loans, and financial institutions were seeking higher returns from mortgage related securities.  

        To understand the beginnings of the crisis one must first understand the American consumer in the turn of the millennia.  The American home buyer was benefiting from lower rates and increasing housing prices.  These bowers were attracted to the low rates of new lending instruments such as adjustable rate mortgages or ARM loans.  Fueled by speculation of continued housing growth and the possible opportunity to refinance at lower rates or selling their homes and trading up, many borrowers fell for these incentives and took on greater risk when borrowing.  Many of these consumers did not understand the risk that they were taking.  In many ways the loans instruments sold to the consumers could be considered predatory.  That is to say, these placed a large amount of interest rate risk onto borrowers.  This consumer mentality can best be seen in housing price and other trends.