The subprime mortgage crisis of 2008 continues to be a hot topic today because it still impacts the lives of people today. Consequently, there are many theories explaining why this crisis happened, who were key players, and who were negatively impacted. It is clear that subprime mortgages existed because it provided attractive returns however, these attractive returns came with extremely high risks that eventually did not work out in both the lenders and borrowers favor.
According to Pajarska and Jociene (2014) the subprime mortgage crisis was caused by the credit boom and the housing market bubble. It is argued that the direct cause of the financial turmoil was the steep increase and subsequent sharp decline of housing prices, which in conjunction …show more content…
In order to provide a larger group of people with loans, the federal government enacted a number of acts such as the Community Reinvestment Act (CRA) of 1977, the Deregulation and Monetary Control Act of 1980, and the Tax Reform Act of 1986. According to the Federal Reserve, the Community Reinvestment Act (CRA) of 1977 was intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate-income neighborhoods, by providing these institutions with favorable incentives. (“Community Reinvestment Act (CRA)”, 2014). The Federal Reserve asserts that the Deregulation and Monetary Control Act of 1980 authorized depository institutions to offer interest bearing transaction accounts to individuals and nonprofit organizations as well as charge higher interest rates to borrowers with low credit scores. (“Depository Institutions Deregulation and Monetary Control Act of 1980”, 2013). Lastly, the Joint Committee on Taxation confirmed that the Tax Reform Act of 1986 eliminated the interest deduction for consumer loans, but continued the mortgage interest deduction (“General Explanation of the Tax Reform Act of 1986”, 1986). Eventually, these acts encouraged financial institutions to offer mortgages to individuals whom would not qualify for prime mortgage loans. By the early 2000s, subprime mortgage loans …show more content…
The mortgagor may sell the home to cover the balloon payment or refinance the mortgage (Reed, 2007). However, there are extreme risks that balloon mortgagors did not seriously consider such as, not being able to convince their current lender or another entity to finance the balloon payment, which resulted to him/her defaulting on the loan. Additionally, if the borrower decides to pay the balloon payment by selling their property and its value has fallen, he/she is also likely to default on the loan. Even if the mortgagor is able to successfully refinance the balloon payment, their interest rate may be higher which can increase their monthly payments. Consequently, these high-risk factors also contributed to the subprime mortgage crisis of
According to Pajarska and Jociene (2014) the subprime mortgage crisis was caused by the credit boom and the housing market bubble. It is argued that the direct cause of the financial turmoil was the steep increase and subsequent sharp decline of housing prices, which in conjunction …show more content…
In order to provide a larger group of people with loans, the federal government enacted a number of acts such as the Community Reinvestment Act (CRA) of 1977, the Deregulation and Monetary Control Act of 1980, and the Tax Reform Act of 1986. According to the Federal Reserve, the Community Reinvestment Act (CRA) of 1977 was intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate-income neighborhoods, by providing these institutions with favorable incentives. (“Community Reinvestment Act (CRA)”, 2014). The Federal Reserve asserts that the Deregulation and Monetary Control Act of 1980 authorized depository institutions to offer interest bearing transaction accounts to individuals and nonprofit organizations as well as charge higher interest rates to borrowers with low credit scores. (“Depository Institutions Deregulation and Monetary Control Act of 1980”, 2013). Lastly, the Joint Committee on Taxation confirmed that the Tax Reform Act of 1986 eliminated the interest deduction for consumer loans, but continued the mortgage interest deduction (“General Explanation of the Tax Reform Act of 1986”, 1986). Eventually, these acts encouraged financial institutions to offer mortgages to individuals whom would not qualify for prime mortgage loans. By the early 2000s, subprime mortgage loans …show more content…
The mortgagor may sell the home to cover the balloon payment or refinance the mortgage (Reed, 2007). However, there are extreme risks that balloon mortgagors did not seriously consider such as, not being able to convince their current lender or another entity to finance the balloon payment, which resulted to him/her defaulting on the loan. Additionally, if the borrower decides to pay the balloon payment by selling their property and its value has fallen, he/she is also likely to default on the loan. Even if the mortgagor is able to successfully refinance the balloon payment, their interest rate may be higher which can increase their monthly payments. Consequently, these high-risk factors also contributed to the subprime mortgage crisis of