Research paper about subprime mortgage crisis

Research paper about subprime mortgage crisis - Hard Times...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Hard Times for Subprime Whether a suburban bungalow, downtown loft, or rural farmhouse, house ownership plays an integral part of the American dream. Unfortunately, for many Americans who purchased their homes during the early 2000’s housing boom, that dream became a nightmare. Between 2001 and 2005, millions of people otherwise unlikely to qualify for mortgage loans took advantage of the rapidly expanding subprime loan market, an area of the mortgage industry focused on “loans to borrowers with high credit risk, and the mechanisms that have evolved to originate, service, and finance those loans” (Sabry and Schopflocher 1). Characterized by FICO credit scores below 620, indicating a poor or nonexistent borrowing history, and the ability to make only small down-payments subprime borrowers were offered a variety of innovative, and at times deceptive, home loans (Sabry and Schopflocher 2). Particularly popular options included the 2/28 hybrid loan and the interest-only mortgage. The 2/28 hybrid offered a “fixed, low rate for the first two years” after which it became an adjustable rate loan, a loan whose interest rate would be reset according to market conditions several times a year(Sabry and Schopflocher 3). The interest-only mortgage allowed the debtor to pay only the interest for an initial period, until payments increased to covering the principal combined with the continuing interest. These, superficially attractive loan offers, combined with rising house prices and low interest rates, made a convincing case for buying a house. Not surprisingly, the subprime mortgage industry grew exponentially, accounting for 20% of all mortgage loans by 2005 (Sabry and Schopflocher 2). While newly minted homeowner may have enjoyed brief domestic bliss, a harsh reality check soon arrived. By 2006, property value growth slowed and interest rates continued to rise (Sabry and Schopflocher 9). Beginning in 2004, “the Federal Reserve [had] raised interest rates from 1 percent to 5.25 percent” (Keck). Facing an adjustable rate mortgage with constantly increasing
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
monthly payments and a mortgage loan valued higher than the depreciating collateral property, many subprime borrowers were left with few options. Mortgage delinquency and foreclosure, the failure to make scheduled payments and the resulting repossession of collateral property, respectively, began to skyrocket, setting off what has become known as the subprime mortgage meltdown. Projections estimate that almost 20 percent of subprime mortgages originated in 2005 and 2006 will end in foreclosure, costing American households $164 million (Keck). While these figures are astounding, the reason the crisis has been so highly publicized, so controversial, and so potentially devastating is the mortgage industry’s diverse, highly complicated, and far- reaching infrastructure. A solution that reapplies the mortgage and housing industries’ resources will help limit the consequences of the crisis. The widespread substitution of securitization for the traditional two party interactions
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 8

Research paper about subprime mortgage crisis - Hard Times...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online