The Subprime Mortgage Crisis Essay

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The Subprime Mortgage crisis
ECO 2072 Principles of Macroeconomics

In the beginning
One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage
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But with the mortgage backed securities such guidelines or qualifications were not necessary.
Weakened Guidelines
A guideline called the state income verified assets (SIVA) allowed people to state and show that they had funds in the bank. The no income verified assets (NIVA) allowed people to just have funds in the bank without verifying a source of income. As time went by other qualification guidelines weakened and gave easier access to mortgages. Finally, the no income no assets (NINA), allowed people to only need a credit score and nothing more. These guidelines occurred because banks no longer cared about the risk, but instead took a higher interest in the lending of the mortgages (The Subprime Mortgage Crisis Explained).
Securitization
The ease the guidelines gave borrowers lead to a mortgage boom. Investors began borrow even more just so they could buy more homes to use for as assets in future investments. “The most significant cause for this boom appears to be the increase in the securitization of mortgages” (Kirk). If money hadn’t been more accessible mortgages would not have been taking advantage of. “As real estate prices rose in the early years of this decade, and securitization provided more working capital for mortgages, lenders relaxed there underwriting criteria in order to issue more mortgages” (Kirk). Black’s Law Dictionary

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