Subprime mortgages were often made with initial low

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repay the mortgages. Subprime mortgages were often made with initial low teaser rates that gave the impression to a lower income borrower that he or she could afford the house in question. The rates would later increase dramatically. Some borrowers were too unsophisticated to understand the terms of the mortgages. Others were told that when the rates jumped dramatically they could just refinance the loan under the assumption that the property would increase in value. Eager buyers overlooked the risk of repayment because the mortgages were secured by real estate. As long as real estate continued to go up in value the holders of the mortgages were protected. In late 2006, early 2007 the real estate market showed signs of distress. By 2008, real estate values were declining precipitously across the country. As a result, the amounts owed by borrowers on their mortgages exceeded the value of the property which secured the loan. Defaults skyrocketed. Many banks and Wall Street investment houses held an enormous amount of mortgages as investments. Moreover, these firms borrowed heavily to finance their purchase of these mortgages. A small decrease in the value of the mortgages could have a significant impact on these firms. A large decrease was catastrophic. The firms’ risk models did not contemplate what would happen in the case of a real estate meltdown because such a meltdown was considered too remote to build into the models.
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  • Fall '12
  • peter
  • Subprime mortgage crisis, subprime mortgages, Peter Sullivan

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