Subprime Mortgage Essay

Improved Essays
Benjamin Franklin once said, “money has never made man happy, nor will it, there is nothing in its nature to produce happiness. The more of it one has the more one wants” (brainy quotes). 8 years ago the United States economy suffered the most extensive downturn since the Great Depression. Leading up to the financial crisis prices of homes were on the rise and home- ownership rates rose to monumental level of 68.8%. Traditionally when customers apply for a mortgage the customer would put 20% down and then take a mortgage out for the other 80%, but as the prices of home began to rise lenders began to make loans to perspective homeowners who normally would not qualify (Bigio). In 2008 the United States of America suffered a financial crisis in …show more content…
A subprime mortgage is defined as a loan given to customers with poor credit histories who would normally not qualify for a conventional mortgage. “Most subprime loans had adjustable interest rates, with a low initial interest rate (often called ”teaser rates”) that would later rise in a process known as mortgage reset” (Bigio). As the values of homes rose in the real estate market more customers were applying for mortgage and buying homes increasing the overall economic profit from the market. The U.S. ownership rate increased from 64 % in 1994 to an all-time high peak of 69.2 % in 2004. (Business) Now that the housing market was a boom, many borrowers(AKW) wished to invest money into the market but, many of these customers while they might have had a clean credit history they(erase this word) lived in a low income household and could not cover their mortgages, forcing them to take out more loans therefore, creating more debt. Lending money to those with low income or those who have poor credit is not the smartest business chose(right word?) so lenders simply create a higher interest-rate 's to try and compensate for the greater risks

Related Documents

  • Great Essays

    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.…

    • 1277 Words
    • 6 Pages
    Great Essays
  • Improved Essays

    The “American Dream” is a lifestyle ideal that attracts people from all over the world. This ideal is that in America, everyone has an equal opportunity to achieve success, homeownership, and prosperity through hard work, determination, and initiative. However, even with hard work, determination, and initiative, obstacles can arise that can impede one’s achieving of this success. Gender, socioeconomic class, education, and traditional culture can influence peoples’ pursuit of the “American Dream”. Gender plays an important role in the pursuit of the “American Dream”, but more importantly, gender bias plays a key role in woman’s pursuit of the “American Dream”.…

    • 831 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    Homeownership In America

    • 1125 Words
    • 5 Pages

    In 1994, President Bill Clinton introduced the National Homeownership Strategy (NHS) with the goal of raising homeownership to an all time high. Again, the conversation continued to be about the benefits of homeownership, not the ever-present, significant risks. The NHS attempted to create 8 million new homeowners while helping low-income families and minorities that had previously been left behind in the government’s efforts to increase homeownership. The NHS proposal outlines three primary methods by which it would accomplish that goal: Encouraging the construction of low-cost housing, targeting “underserved” communities, and reducing down payment requirements (National Homeownership Strategy).…

    • 1125 Words
    • 5 Pages
    Improved Essays
  • Great Essays

    The Great Recession was caused by a number of different factors and the effects were abundant. With so much disagreement on what truly caused the recession, it is apparent that it cannot be pinpointed to one single event or action, but rather a number of factors that set off this devastating economic event. The recession can be blamed on a combination of factors such as deregulations by politicians, AIG, the S.E.C, and many others. The effects of the recession were felt by homeowners, banks, and many working Americans as the economy declined, leaving numerous drowned in debt.…

    • 958 Words
    • 4 Pages
    Great Essays
  • Improved Essays

    And in what ways has the term predatory lending shaped perceptions and attitudes of the subprime mortgage crisis, giving rise to image of large, avaricious institutions gobbling up not only the American homeowners, but the American dream itself? (624). although, the increase in loans was not a bad deal for everyone. For many that used to be considered to have low credit scores like minorities and immigrants, brought many opportunities in becoming a homeowner. But we were unaware of the risk and crises we were about to hit…

    • 986 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    “In 1934, Congress created the Federal Housing Administration (FHA),” which insured private mortgages. When the federal government backed the loaners’ investments on house mortgages, this caused “a drop in interest rates and a decline in the size of the down payment required to buy a house” (Coates). As stated in lecture, while the federal government could cover some bad bets, a majority of loans made had to be good to outweigh the bad ones. Consequently, to calculate the risk of home buyers defaulting on their loans, the “FHA adopted a system of maps that rated neighborhoods according to their perceived stability” (Coates). On the maps, the green areas with an “A” rating marked the neighborhoods that were “excellent for [FHA] insurance” and “lacked a single foreigner or Negro” (Coates).…

    • 757 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    The Giant Pool of Money Analysis Every individual in the United States wishes to be a homeowner because owning a home is considered as the ultimate achievement by majority of the population and is a symbol of successful and fulfilling life (Grant, Rick). So in the early 2000s when individuals were provided an extremely easy way of getting a loan and buying a home irrespective of their job and background, majority of them grabbed the opportunity. But, this scheme of simplifying mortgage rules and procedures led to overvaluation of mortgages based on an assumption that housing prices will continue to escalate led to the financial crisis of 2008 (Blumberg and Davidson). One of the biggest issue during crisis was that the decisions made around…

    • 970 Words
    • 4 Pages
    Superior Essays
  • Improved Essays

    Foreclosure Crisis Essay

    • 838 Words
    • 4 Pages

    During the Foreclosure Crisis several years ago, my community was hit hard. I never thought I would see homes in my neighborhood being foreclosed. It was unbelievable. I was in middle school and high school when this was going on and heard my parents discussing this many times.…

    • 838 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    After the crash of 1929, there was a need for an act that would limit the use of bank credit for speculation and to direct bank credit into what more fruitful uses, such as industry, commerce, and agriculture. In response to these concerns, the main requirement of the Banking Act of 1933 was to separate commercial banking from investment banking. Basically, commercial banks, which took in deposits and made loans, were no longer allowed to finance or deal in securities , while investment banks, which financed and dealt in securities, were no longer allowed to have close connections to commercial banks. After the act passed, banks were given a year to decide if they would dedicate all their attention to commercial or investment banking. Only…

    • 899 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    There was a long term American Policy of promoting home ownership. The main aim was to make the financing of a new home as easy as possible for the homebuyer. Overtime, various financial institutions have been set up to promote homeownership such as Fannie Mae (The Federal National Mortgage Association). This government sponsored enterprise (GSE) was founded during the great depression by Congress, its aim was to stimulate the housing market by making more mortgages available to moderate-to-low income borrowers. They do not originate or provide mortgages to borrowers, they purchase already issued mortgages off the mortgage originators and guarantees them via the secondary mortgage market.…

    • 444 Words
    • 2 Pages
    Improved Essays
  • Improved Essays

    Middle Class: The American middle-class is anyone who comfortably (though surely, not without hardship at times) affords life’s necessities. These include: shelter, sustenance, clothing and transportation. It can be used as a label for those in the vast socio-economic group which is comfortably above the poverty level, but not within reach of say, the top ten-percent. Many people believe the middle-class shrunk as interest rates on mortgages rose, making it difficult for people to make payments and hold onto their homes. African-American: Any people of African ancestry who have been born in America as well as those who have or were forced to settled in America and who have made a home in America.…

    • 257 Words
    • 2 Pages
    Improved Essays
  • Decent Essays

    The mortgage crisis occurred due to banks lending large mortgages to people who thought this was acceptable because the value of their homes would only rise. 2. When the value of homes started to decline, banks asked for payment on mortgages which in turn, forced people to make all their assets, including stocks, liquid to pay their debts (Davies, 2008). 2) With the stock prices bottomed out because of mass forced selling, they began to rise after the government bailouts of the financial institutions. A. The market is slowly rising and will inevitably reach its high prior to the market decline giving first time investors the opportunity to make a small fortune.…

    • 861 Words
    • 4 Pages
    Decent Essays
  • Improved Essays

    The American Dream of home ownership was no doubt sucker punched during the Great Recession and became what many wished was a nightmare they could wake from. Deep emotional scars pierced many of all ages who had lost their homes during the housing crisis. As a result, visions were blurred as they wondered whether they would ever be able to own their own home again. People who were fortunate enough to maintain their mortgages saw their home values decline. Trust in our economy was compromised in the process.…

    • 828 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    Housing Market Bubble Case Study

    • 1229 Words
    • 5 Pages
    • 10 Works Cited

    In 2005 over 1,283,000 family homes were sold throughout the U.S. housing market according to U.S. Statistics. This was a larger number of houses sold compared to previous years with a range of 609,000 houses being sold per year. This was expansion, with lower interest rates, economic booms, and most people living in houses they couldn’t really afford if you looked into their finances. This is what later created negative home equity balances, and forecloses along with many evictions. Before the collapse of the housing bubble more and more people thought at least that they were “living the American…

    • 1229 Words
    • 5 Pages
    • 10 Works Cited
    Superior Essays
  • Superior Essays

    Massey Energy Case Study

    • 1823 Words
    • 8 Pages

    Certain homebuyers purchased homes that they knew they couldn't afford. They knew the amount of money they were bringing in a month couldn't sustain the addition of a mortgage. Mortgage lenders many loans to people with poor credit and total disregard of whether the party could pay the loan back. The lenders saw cash in their eyes with little risk, so they did as any other unethical company would do. Policymakers wanted individuals to take advantage of policies that would help home ownership regardless of the individual financial circumstances.…

    • 1823 Words
    • 8 Pages
    Superior Essays