Table of Contents
- Buy Subprime Mortgage Loan Crisis essay paper online
- Causes of Subprime Mortgage Crisis
- Impacts/Consequences of the Subprime Mortgage Crisis on Families (Foreclosure)
- Three Measures that Can Be Taken to Correct the Housing Crisis Problem
- Summary and Conclusion
- Related Free Economics Essays
The crash in the housing market set off a chain of foreclosures and other problems that threatened to undermine our economic foundation. How can we prevent this from occurring again?
Housing is a platform for numerous factors that influence the quality of life, thus being directly linked to the economic competitiveness. In order to win the economic future, the US believes that it cities’ housing markets ought to improve their operation. The Recovery Act had addressed the crisis through various collaborations that mitigate the effects of foreclosures and promote smarter growth. Unfortunately, the collapse of the housing bubble, which was driven by the access to credit, left many families unable to maintain paying their mortgage payments (Navarro 53). The paper analyzes how the housing market crash set off a chain of foreclosures and the problems that threatened the economy of the US. It will review the possible ways of preventing that problem from further occurrence.
The subprime mortgage crisis is attributed to the burst of the housing bubble that had increased the house prices in the past and the default rates. The government has in the past adopted policies that encourage Americans to own their homes (Aziegbemhin 29). Consequently, the lenders were obliged to provide mortgage loans to the people with difficult credit history and lower ability to honor their loans. Affordable housing in the United States led to home building; the government sponsored entities (GSE) lobbies, and the creation of real estate. Different entities developed a partnership to achieve the support of political leaders and the government in implementing the affordable housing through creative financing. Financial institutions were also committed to ensuring that the funds are available for the successful implementation of the same. This led to poor risk management since the enterprises and individuals were more consumed with creating affordable housing rather than the possible effects on the economy in the future. Leniency in the rules and regulations that governed the real estate development and access to funds were also achieved. Consequently, approval models became an easy game. Documentation is also reduced. Ultimately, mortgage insurance requirements also changed. Consequently, many processes became automated, including underwriting and appraisal process. The aim of such innovations was to ensure affordable housing through creative financing (Aziegbemhin 29). However, there might be unexpected effects of such action in the near future. Subprime mortgages were granted at relatively higher interest rates than the equivalent prime mortgages or loans due to the poor credit history of the borrowers and the risks that are involved. Subprime lending is considered risky for both the lenders and the borrowers. Lenders tend to offer expensive credits due to the similar failure in repayments.
In the long-run, the economy was negatively affected. It was evident that home ownership started to rise due to the above factors. This also caused an increase in the price of homes. However, such situation lasted for a short period since the prices of homes started to decline few years later. In this case, it was difficult for the borrowers to refinance their loans. Consequently, most of them were left with no choice but to close their business. This has greatly affected the credit flow to businesses; hence, most of them found it hard to fund their development projects as well as compete on the market. The economy was also affected to the great extent (Aziegbemhin 29).
Causes of Subprime Mortgage Crisis
Over the years, United States Federal Government has promoted and adopted policies that encourage its citizens to own their homes. The government has adopted policies and enacted legislation that has contributed to the expansion of the mortgage bond market. One of the steps that were taken is the introduction of new types of mortgages, such as subprime lending. They will allow the borrowers with poor credit histories and weak documentation of income, who initially were unable to access information, to buy homes (Bianco 4). Fair value accounting can also be blamed for the subprime crisis. A fair value of accounting can be described as a financial reporting method that obligates companies or organization to report some of their assets and liabilities using the possible market price of the asset or liability in question. The implementation of the fair value accounting was aimed at aiding companies and organization to be able to report their losses and profits in the desired manner (Bianco 4). However, this was also at a considerable price because it contributed a lot to the subprime crisis.
Therefore, the approach led to the increase in Non-Performing Assets (NPA) ratios among the banks. This resulted from the introduction of the approach while reporting bank assets. Moreover, bank contagion was also increased, hence the spread in weak banks that were unable to handle the consequences of the global financial crisis. Most of the banks were obliged to close their financial activities, hence affecting credit flow into the business. Fair value accounting also worsened the issue of financial instability. This can be attributed to interconnectedness among financial institutions, the broader economy, and market in the United States. Consequently, a problem that influenced one institution affected others in the economy. Low-income borrowers were forced to default in repaying their loans resulting in the subprime mortgage crisis and foreclosure. The financial mortgage crisis affected other areas such as the financial and credit market that eventually caused the global financial crisis. The situation, which started as a strategy to enable low-income families to purchase or own homes, turned into the crisis that significantly contributed to the financial crisis and recession both in the United States and in the whole world.
Along with the first order offer - 15% discount, you save extra 10% since we provide 300 words/page instead of 275 words/page
Impacts/Consequences of the Subprime Mortgage Crisis on Families (Foreclosure)
The subprime mortgage crisis has had some adverse consequences and impacts on the families. Subprime mortgage crisis led to a wave of foreclosures, due to which many people lost their homes (Tong and Shang-Jin Wei 15). The foreclosures concerned the people who had borrowed subprime mortgage loans to purchase home in a position of having to find alternative homes or places to live. Some families were forced to search emergency shelters or live on the streets. The increasing housing prices also make it difficult to purchase alternative homes. Federal Reserve System indicated that home foreclosure may cause damage to the prospects of the individuals having a comfortable retirement since a home is considered the most valuable assets among the Americans.
Foreclosure forces people and their children to leave their homes, and this may affect the school children as well as their education. It disrupts their educational process, peer relationships, and the social networks. Foreclosure may affect the family’s physical and emotional wellbeing. Families who lose their homes are likely to suffer emotional and psychological problems that are associated with being evicted from their houses. The net worth of the homeowners also declined significantly. Some of the homeowners may turn to some criminal activities, such as arson, in cases where they are unable to repay the mortgage loans for their homes. The crisis was also characterized by massive job losses since major financial institutions were collapsing due to the defaults of the borrowers.
The consequences proved to be devastating because the prices of houses began to drop; easy initial terms expired, and credit was tightened. Consequently, it was difficult to attain refinancing. More lenders became careful when making loans, especially in case the collateral was mortgage-backed securities.
Identify and describe the likely consequences if the United States is not able to fix the housing crisis.
The housing crisis problem has had profound effects on the nation’s economy since it remains one of the few significant products provided in the US. If not immediately solved, the ripple effect will also spread outside the industry. It began with the reduced need for jobs and services that support housing industry businesses and workers. If the problem is not fixed now, the nation should brace itself for increased unemployment accompanied by slow economic growth. Unemployment will continue rising for the next ten years of the housing crisis if not solved. Due to the fact that the economic recovery continues to move toward attaining full employment and the demand for credit increases, the interest rates are likely to arise due to large deficits of the government budget. The increased interest rates will increase the demand for the dollar assets since the foreign investors number is likely to grow. There is a possibility that the long-term performance of the U.S. economy may be affected by the persistent large budget deficits and rising public debt.
Book The Best Top Expert at our service
Your order will be assigned to the most experienced writer in the relevant discipline. The highly demanded expert, one of our top-30 writers with the highest rate among the customers.Hire a TOP Writer for $10.95
Several efforts ought to be made to ensure full recovery of the US economy that is characterized by full employment. The consumers remain reluctant to take new debt making the stock of debt remain low. The GDP is low, and last year’s second quarter shows that the GDP had surpassed its peak. The recovery in housing is still lagging despite recent recovering processes. Home prices have been the key source of lags in the recovery, and this has been evidenced by the fall in prices even after completion of the recession. These declines in prices have severely affected the household balance sheets resulting in avoidance of debt, weaker consumer demand, and slow recovery. The weakness has also been experienced in the labor market where job losses have continued to occur (Department of Treasury and Department of Housing 5).
Three Measures that Can Be Taken to Correct the Housing Crisis Problem
This problem will be solved using the Federal Reserve policies, monetary policy, fiscal policy, and the federal debt (Department of Treasury and Department of Housing 5). The Federal Reserve has been engaged in conducting monetary policy to foster long-term statutory objectives such as maximizing employment, price stability, and moderating interest rates. Since the beginning of recession in 2008, one of the arms of Federal Reserve known as Federal Open Market Committee (FOMC) has maintained a monetary policy. The policy is very accommodative and supportive of economic recovery because it ensures low rates of inflation.
VIP support ensures that your enquiries will be answered immediately by our Support Team. Extra attention is guaranteed.Hire a VIP Support for $9.99
The Federal Reserve ought to continue holding short-term interest rates near zero, reducing long-term rates and amassing more than $2 trillion in government debt as well as mortgage-backed securities. This will help to prevent the economy from facing the second depression.
The central irony of the financial crisis is that while it has been caused by exaggerated borrowing, lending, confidence, and spending, it can be resolved only in the same way. It should be understood that the credit standards for persons seeking to own homes in America are rigorous and too high nowadays (Summers Para 8). This has reduced the demand for houses, lower prices, and foreclosure increases. Therefore, such situation has led to further tightening of the credit standard and a vicious cycle that is growth destroying.
Stabilizing the housing market requires corresponding actions concerning the large and growing inventory of all the foreclosed properties. The reason is that the huge overhang of properties that are foreclosed is deterring home purchases (Summers Para 8).
Affiliate Program: Earn 10%
from all orders made by people you bring!
Your people also get 17% discount for their first orderJoin now
Summary and Conclusion
The subprime crisis has been discussed by many scholars and media houses. However, less emphasis has been placed on the causes and its consequences for the market as well as the economy. Three factors have been considered as the major contributors to the same. These include affordable housing, regulatory lapse, and fair value accounting. Due to the affordable housing, regulators and the entire nation concentrates more on ensuring people that they can afford homes while overlooking the negative effects. Due to the regulatory lapse, the regulators failed to define the indicators of the crisis; hence, they did not find new strategies to deal with that problem. Fair value accounting practices has caused many banks to incur losses as well as led to financial instability.
This crisis has resulted in some devastating consequences such as U.S. financial crisis and economic meltdown. Besides the effects on the United States and the global economy, the crisis also had impact on the social institutions such as families. Several families have lost their homes. Losing houses has affected the physical, emotional, and psychological wellbeing of the families.