The Housing Financial Crisis, part 1: Subprime Loans and Associated Risks

housing-crisis-prices-fall-in-the-us-market

(Silva, Housing crisis prices fall in the US market)

Subprime Loans: The Under-the-Radar Loans that Felled a Market

Subprime Loans and Associated Risks

     The housing crisis beginning in 2007 resulted in approximately 1.5 million foreclosed homes that year and at the time predicted increases in future years according to Joseph Gilbert (2011). Mr. Gilbert also states that “[a]lthough subprime mortgages accounted for less than 20 percent of all mortgages outstanding, just over half of these foreclosure initiations were on subprimes (2011, p. 88). A subprime loan is a loan given to “individuals who do not qualify for prime rate loans” under normal circumstances (Gilbert, 2011, p. 89). Many attribute owning a home to be the most central element towards obtaining ‘The American Dream’, but there were many elements that contributed to…and resulted from the Subprime Loan Housing Crisis.

     Jeff Holt summarizes the contributing factors of the housing crises in 4 primary causes. They are low mortgage interest rates, low short-term interest rates, relaxed mortgage loan standards, and irrational exuberance (2009). Low mortgage rates gradually occurred over a span of 20 years when high interest rates were implemented to combat inflation (Holt, 2009). Low short-term interest rates were introduced as a result of the smaller recession of 2001 to support an economic recovery (Holt, 2009). According to Mr. Holt, there were no signs of significant inflation present at the time (Holt, 2009). Relaxed mortgage standards were primarily the result of “new governmental policies aimed at fostering [lower-income] home-ownership,…greater [internet] competition, increasing [debt] securitization,…and the irrational exuberance” (Holt, 2009).

     As the crisis bubble began to burst, blame was issued to many, assistance given to some, and losses incurred by most involved. Mr. Gilbert list five possible “culprits” to the housing crisis: Borrowers; Lenders; Securitizers (bundlers); Rating Agencies; and Investors (2011). Mr. Holt lists lender, investment banks, foreign investors, and insurance companies as those who have incurred large losses (2009). In my next posts, I investigate more into the causes of the crises as well as what could be done to reduce the effects in the future.

                                                                                                                         Reference List

Gilbert, J. (2011). Moral Duties in Business and Their Societal Impacts: The Case
of the Subprime Lending Mess. Business & Society Review (00453609), 116(1), 87-107. doi:10.1111/j.1467-8594.2011.00378.x

Holt, J. (2009). A summary of the primary causes of the housing bubble and the
resulting credit crisis: A non-technical paper. The Journal of Business Inquiry, 8(1), 120-129. Retrieved from http://www.uvu.edu/woodbury/jbi/volume8

Silva, R. (2010, July 25). Housing crisis prices fall in the us market [Web Graphic].
Retrieved from http://www.economiabr.com.br/index.php/25/07/2010/a-economia-dos-eua-tornou-se-o-grande-problema-do-mundo-atual

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