Subprime Mortgage Crisis

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The subprime mortgage crisis was the closest the United States had come to economic instability. The subprime mortgage crisis was a four-year long period in which the home prices and ownership plummeted. The crisis started out in the 1990s, when the United States government wanted to help increase homeownership by the deregulation of policies. To tackle the issue of “affordable housing” the Department of Housing and Urban Development helped ease regulation to private companies and banks when offering home loans potential homeowners who either had a low credit score or annual income (Carney). The companies that took advantage of the deregulation of mortgage lending were Frannie Mae and Freddie Mac. Because of government policies Americans obtained …show more content…
The mortgage crisis began due to the decrease in interest rates. As the number of people who applied to home mortgage loans got approved resulted in a shortage of homes on the market. To cope with the lack of homes on the market led to the construction 2.4 million homes, apartments, and townhomes (Schaeffer). The increase in demand in homes increased home prices from “7 percent in 2001 to 10 percent in 2005” (Schaeffer). Low interest rates encouraged first time potential homeowners to apply for home loans. The interest dropped from 6.5 percent to 1 percent in the years prior to the mortgage crisis (Holt). According to the Subprime Mortgage Crisis article the number of homeowners increased from “64 percent in 1994 to an all-time high of 69.2 percent in 2004” (“Subprime Mortgage Crisis”). Another cause for the housing crisis was that banks and private companies began to relax application standards for home loans. When applying for any type of loan banks and private companies check credit scores to see whether an individual is a dependable borrower. However, during the crisis, lenders were issuing loans to potential homeowners who had credit scores below 690 that were not dependable (Holt). Eventually, as the approvals on home loans increased many people used the loans as an investment tool. The Subprime Mortgage Crisis article states, “40% of homes purchased were not intended as primary residences” (“Subprime Mortgage Crisis”). Many of the homes bought were either vacation or investment homes. The vacation homes generated extra by being rented in months not used and the investment homes were remodeled and flipped back into the market (Holt). The Federal Reserve worried that low interest rates encouraged risky borrowers to own a home; therefore, interest rates rose from “1 percent to 5.25 percent” (Bianco). The increase in interest

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