The United States Subprime Mortgage Crisis was a nationwide financial crunch, that happened between 2007 and 2010. This further contributed to the US recession that leads from December 2007 to June 2009. It was triggered by a large decline in the home prices after the collapse of a housing bubble, leading to mortgage wrongdoings.
What is a Subprime Mortgage?
The Subprime Mortgages are named for the borrowers that the mortgages are given to. If the primary rate for a mortgage is what is offered to the people with enough credit and a history of reliability, subprime is for those who have writhed to meet those standards. The people who are approved of subprime mortgages have low credit scores and debt problems. There is no fixed number, but a FICO score below 640 is usually observed as subprime for a loan like a mortgage.
People who have mottled credit histories often have tremendous difficulty in getting consent on a mortgage and as such the payments done on monthly basis have higher rates of interests than the normal since the loan is considered much riskier than investors.
How did the Subprime Mortgage Crisis Start?
Have you ever imagined how did the U.S economy get to the point where in 2007, a full-on housing crisis began?
All this didn’t happen overnight. In the early to mid of the 2000s, the rates of interests on the house payments were comparatively low. During the early 2000s, the economy was quite solid, but after the recession, there were many people who were struggling for credit to qualify for the subprime mortgages with manageable rates.
This sudden and small increase in subprime mortgages happened due to the Federal Reserve’s decision to significantly lower the Federal Funds rate to spur growth. There were many people who couldn’t afford homes or get approved for loans were qualifying for subprime loans and choosing to buy, and American home ownership increased exponentially.
Real estate purchases increased not only for subprime borrowers but, for well-off Americans as well. With the increase in the prices and expectations of the people also continued to rise, investors who got burned by the dot com bubble of early 200s and needed a standby in their portfolio started capitalizing in real estate.
Housing prices were on a rapid rise and the number of subprime mortgages given out was rising even more. By the year 2005, some people were fearing this to be a housing bubble. From 2004-2006, the Federal Reserve raised the rates of interests over dozens of times in an attempt to reduce this down and dodge serious inflation. By the end of 2004, the rate of interest was 2.25% and by mid 2006 it went up to 5.25%.
This was not enough to cease the inevitable. The bubble burst. The years 2005 and 2006 were observed as the crash down of the housing market. The lenders of Subprime Mortgage began laying thousands of employees off, further if not filing for bankruptcy or entire shut down.
What Parties were blamed for the Crisis?
The subprime mortgage crisis, that led to the Great Recession, has many parties responsible for the crisis. One being the lenders who were selling these as mortgage-backed securities. After the lenders agreed and gave out the loan, that credit would be traded to an investment bank. Further, the investment bank would club this mortgage with other similar mortgages for the other parties to participate in and the lender would, as a result, have more money to use for home loans.
Effects of the Mortgage Crisis
The home prices rapidly dropped as the housing bubble completely burst. This was bad news for many homeowners, who were seeing the rapid rise in the rate of the interest on their mortgage which further leads to the deterioration of the home. Unable to pay their mortgage on a monthly basis and unable to sell the home without taking a massive loss, many had no option. The banks then foreclosed on their houses. Even the home owners who have good credit and qualified for the standard mortgages fought with the constant rise in the interest rates.
Investment banks that bought and sold these loans that were being defaulted on started failing. The lenders no longer had the money to continue giving them out. By the year 2008, the economy was in total freefall.
There were some institutions that got bailed out by the government and other banks, who got themselves involved in the mortgage business were not so lucky.