Subprime
In year 2007, United States witnessed the Subprime Mortgage Crisis, which was known as the “Mortgage meltdown”. It triggered a national financial crisis, which led to a tremendous decline is the housing market, rise in foreclosures and the collapse of some leading banks. This essay will look into the various causes of the subprime crisis as well as the parties who are responsible for this economic tragedy.
Years prior to the crisis, United States had large inflow of foreign funds. In 2001 to 2003, The Federal Reserve Board lowered interest rates from about 6.5% to 1.0% in an effort to improve the economy of the United States. This sets off a domino reaction where it allows easier borrowing of funds for corporate or consumer and spurs the economy, which eventually led to the rise of Subprime mortgage loans. As the economy recovered, there was a boom in the housing market, which saw properties prices at its peak between the year 2004 to 2006. Thus, the Federal Reserve started raising its rates from the historically low levels.
As the name of the crisis suggests, “Subprime mortgage loans” contributed mainly to this crisis. Subprime mortgage refers to a type of loan granted to individuals with poor credit histories and due to their lower credit ratings; they were not able to qualify for traditional mortgages as the risk of defaulting on these loans were higher. When housing prices peaked, many Americans wanted to get their dream houses especially when there was easy access to credit. Lenders that funded the mortgage loans then started to offer more loans to high-risk borrowers. Despite being aware of their weak credit histories and high defaulting risk, banks still saw it as a attractive investment opportunity because of its liquidity and the assumption that housing prices were appreciating.
Soon came the burst of the housing bubble. As interest rates started rising, it made borrowers difficult to refinance their loans once the easy initial terms had expired.
Years prior to the crisis, United States had large inflow of foreign funds. In 2001 to 2003, The Federal Reserve Board lowered interest rates from about 6.5% to 1.0% in an effort to improve the economy of the United States. This sets off a domino reaction where it allows easier borrowing of funds for corporate or consumer and spurs the economy, which eventually led to the rise of Subprime mortgage loans. As the economy recovered, there was a boom in the housing market, which saw properties prices at its peak between the year 2004 to 2006. Thus, the Federal Reserve started raising its rates from the historically low levels.
As the name of the crisis suggests, “Subprime mortgage loans” contributed mainly to this crisis. Subprime mortgage refers to a type of loan granted to individuals with poor credit histories and due to their lower credit ratings; they were not able to qualify for traditional mortgages as the risk of defaulting on these loans were higher. When housing prices peaked, many Americans wanted to get their dream houses especially when there was easy access to credit. Lenders that funded the mortgage loans then started to offer more loans to high-risk borrowers. Despite being aware of their weak credit histories and high defaulting risk, banks still saw it as a attractive investment opportunity because of its liquidity and the assumption that housing prices were appreciating.
Soon came the burst of the housing bubble. As interest rates started rising, it made borrowers difficult to refinance their loans once the easy initial terms had expired.