Mortgage Meltdown Research Paper

858 Words 4 Pages
The “mortgage meltdown” came to the public’s attention when a sharp rise in home foreclosures in 2006 spiraled out of control in 2007, triggering a financial crisis that went global in only one year. Consumers started to spend less, the housing market plummeted, foreclosures had risen and the stock market had been shaken. The subprime mortgage crisis was a terrible incident with many valuable lessons for the future of our economy.
“The practice of lending money to people with a weak or limited credit history is called subprime lending.”(Charles W. Bryant and Jane McGrath) A higher interest rate is charged on these mortgages and is intended to compensate the lender for accepting the greater risk in lending to such borrowers.
The economy had been in jeopardy of a recession since the dotcom bubble burst in early 2000. The mortgage meltdown was a result of too much borrowing and faulty financial modeling. This was generally based on the assumption that home prices can only go up. Human greed and fraud also played an important part in this crisis. Central banks tried to fuel
…show more content…
The process for mortgages is sufficiently transparent, allowing lenders to assess the risk quickly and make a decision. Assessing risk becomes more complicated for the holder of the loan with the beginning of securitization. The Law Dictionary defines securitization as a firm 's development of a package of investment opportunities and offering different scenarios of the package to fit a client’s needs ensuring market liquidity and the involvement of more clients in the market. A mortal hazard was created when each link in the mortgage chain collected profits from the transfer of the loans and believed that they were also passing on the risk. When more distorted information between the borrower and the initial lender creates moral hazard, risk is passed on to third-party investors, leading both lenders and borrowers into more risk

Related Documents