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Every day when you turn on the news you're hearing about the sub-prime
mortgage crisis. After reading this article, you'll understand what it is
and what created it in the first place.
What is the Sub-Prime Mortgage Crisis?
The sub-prime mortgage crisis is defined by Wikipedia as an ongoing financial
crisis. More specifically it is a crisis that was triggerd by:
- Mortgage delinquencies
- Mortgage foreclosures
However, there has to be a root cause of the sub-prime mortgage crisis and
the resulting mortgage delinquencies and foreclosures.
What Caused the Sub-Prime Mortgage Crisis?
Simply stated the sub-prime mortgage crisis was caused by borrowers who didn't have
the full ability to pay back their loans. The subsequent drop in home values and prices
that started in 2006 and 2007 resulted in lost value for many of these homes and triggered
a loss of capital in many banks and lending institutions. This simple explanation doesn't
get to the root of the subprime mortgage crisis, there were other causes including:
- Risky mortgage products
- High personal debt levels
- Speculation
- Overbuilding
- Poor judgment
- Concealed risk
- Lack of government oversight
How It Impacted Banks
Banks generally take part in a financial structure called securitization. This involves
combining their assets which include mortgages and using them as collateral to obtain new
assets. This allowed the banks to supposedly minimize their risk and allowed them to keep
lower reserves. However, as home values dropped, the collateralized assets were of lesser
value and banks were then asked to increase their reserves but were unable to do so because
so many of the properties were no longer valued where they were when they were securitized.
In many ways, the sub-prime mortgage crisis was at the heart of this issue.
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Bank Failures and Market Weakness
In 2007 one hundred mortgage companies stopped their business either
through closing, selling or simply stopping their mortgage operations
In July of 2007 the stock market reached it's top trading record -
more than 14,000 on the close of the market - this was the highest that the market had ever
closed.
In August of 2007 in a single day of trading the stock market closed
below 13,000 - this started a worldwide trend of lower stock market prices that still
continues.
© iStockphoto.com - PaulCowan
In August of 2008 it is estimated that more than $500 billion in
sub-prime mortgage related securities were reduced in value by the banks and lending
institutions that held them.
In September of 2008 Lehman Brothers filed for bankruptcy and Merrill
Lynch was merged with Bank of America.
In October 2008 US Congress and Senate passed the $700 billion
bailout.
Other victims
There were other victims of the subprime mortgage crisis, some that seemed unlikely but
they were certainly there. Some of them are:
- Minorities who received a large number of sub-prime mortgages
- Housing crimes (specifically arson) increased
- More than 65,000 jobs were lost in the crisis
- Renters were being evicted with no notice because properties were foreclosed on
- Car sales declined
Millions of retirement funds lost significant value
Summary
The Sub-Prime mortgage crisis has impacted nearly every one of us in some manner. A combination
of multiple factors caused this crisis and it's now up to the government and everyone to
find a solution.
See also: HOPE NOW
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