The Mortgage Meltdown
Rough Introduction -The subprime mortgage crisis and meltdown led to one of the worst recessions America has ever faced. It all started with the housing bubble and subprime borrowers. Prior to 2008 mortgages where highly unregulated. Anyone and everyone could obtain a “no document’ loan, which did not factor the borrowers ability to repay; it was primarily based on a credit report and an appraisal. A borrower could obtain multiple loans for multiple properties. With an increasing amount of homebuyers, the supply of homes became low, causing an over evaluation of homes. When the adjustable rates kicked in borrowers could no longer afford their mortgages, leading to a tremendous amount of defaults causing the housing bubble to burst leaving the loans secured by the dwelling worthless. Subprime loans became possible because of mortgage back securities and the scrutinization process, and because the government deregulated it. Rating agency responsible for determining the risk of the collateralized debt where dishonest and gave excellent ratings to horrible mortgages. The mortgage meltdown and recession would have been avoidable if mortgage brokers, bankers and rating agency’s conducted business with a fiduciary duty and documented a subprime borrowers ability to repay.
A subprime loan is a loan made to higher-risk borrowers with lower income or lesser credit history than “prime” borrower. The borrowers behind these mortgages typically have clean credit histories, but the mortgage itself generally will have some issues that increase its risk profile. These issues include higher loan-to-value and debt-to-income ratios or inadequate documentation of the borrower’s income. Stated income loans allowed a borrower to obtain a loan with out providing documentation to validate the income stated on the application to finance home purchase. This drastically increased the amount of interest only and adjustable rate mortgages being originated. Mortgage bankers and brokers would profit more on subprime loans, putting their interest before the borrowers. In 2004 just 80 percent of all mortgages initiated in in 2004 were an adjustable-rate, and 47 percent were interest-only loans. (Paragraph is not finished yet)
The Following paragraphs:
• Government Deregulation
• Rating agencies issues- horrible bonds getting A ratings (EX: AIG – major rating agency)
• Fannie Mae Freddie Mac and Mortgage back securities
• Wall Street goes down the drain -Wall Street encouraged subprime loans by bundling the loans into securities that were sold to pension funds and other institutional investors seeking higher returns. Once the bubble popped major investment banks, insurance companies, and commercial banks heavily tied to real estate lending went bankrupt or were sold for pennies on the dollar. Prices and trading volumes in mortgage-backed securities shrank dramatically.
• Fiduciary duty of rating agency, brokers and lenders
• New laws and regulations that fixed these issues (TILA, RESPA, ECOA, HMDA, ect.
Souces: (please feel free to add your own sources)
Bianco, Katalina M., and © 2008, Cch. All Rights Reserve. The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown (n.d.): n. pag. Web.
“Housing Finance and the 2008 Financial Crisis.” Downsizing the Federal Government. N.p., n.d. Web. 10 Feb. 2016. <http://www.downsizinggovernment.org/hud/housing-finance-2008-financial-crisis>.
“Subprime Mortgage Crisis – A Detailed Essay on an Important Event in the History of the Federal Reserve.” Subprime Mortgage Crisis – A Detailed Essay on an Important Event in the History of the Federal Reserve. N.p., n.d. Web. 10 Feb. 2016. <http://www.federalreservehistory.org/Events/DetailView/55>
“Subprime Mortgage Crisis.” SpringerReference (n.d.): n. pag. Web.