In late 2008, the U.S. suffered one of its greatest disasters in quite some time, the subprime mortgage crisis. It affected not only the housing market but the whole financial system as a whole. Cheap methods and greed are very possible motivators, leaving lenders, investment banks, and investors bankrupt. The whole system was going to fail from the beginning and could have been stopped or altered to have less damage, and yet only a few were able to see it’s great flaws. This caused thousands, and possibly millions of Americans to go homeless and unemployed. It gave more debt to the U.S. government worsening its ties with different countries. Since America has millions of international businesses and pledges, other countries were affected by its financial collapse. The actions and responses of the government, banks, and citizen themselves helped America to get up on both feet.
This paper will explore the subprime mortgage to better understand the reason of its effect and collapse, to help others understand what it is and what can be done about it. Even if it had been almost a decade since the collapse, the subprime mortgages’ effects still affect us to this day. It’s also very likely that another similar event can strike anytime soon, this paper will help those keep a look out for tragedies and systems that he/she could avoid and potentially survive.
Table of Contents
I. What is a mortgage
A. What are the different types
1. Fixed rate
2. Adjustable rate
3. Balloon
B. Requirements for a mortgage
1. Pre-qualification
2. Credit score
3. Employment History
C. What institutions give out mortgages
1. Banks
2. Non-banks
II. What is a subprime mortgage
A. How does is work
1. Risk
2. Profit
3. Loss
B. Flaws
1. Interest Rate
2. Value
3. Debt
III. The Crisis
A. Bank
1. Bankruptcy
2. Those who didn’t get bankrupt
B. Citizen
1. Homeless
2. Unemployment
C. Government
1. Actions
2. Reputations
IV. The results of it happening again
A. Economy
1. Probability of the Great Depression
2. Probability of less damage
3. Effect on other countries
B. Ways to recover from it quickly
1. Have a more stable economy
2. Remove subprime mortgage
3. Workout with different organizations
Objectives & Core Themes
The primary objective of this paper is to examine the origins, mechanics, and catastrophic impacts of the 2008 subprime mortgage crisis, while exploring preventative measures to avoid future economic collapses.
- The structural mechanics of mortgages and the specific risks associated with subprime loans.
- The role of greed and financial leverage in the systemic failure of banks and investment firms.
- The widespread social and economic consequences, including homelessness, unemployment, and government intervention.
- Strategies for future economic stability and risk mitigation in the housing finance market.
Excerpt from the Book
There are flaws to the subprime mortgage that make it a problem to everyone, not just the lender and borrower but the investors as well.
Investors are people who invest in investments to turn into more money. Mortgages were investments that the investors considered as a good investment. The bank would sell/grant mortgages to borrowers (called homeowners when they buy the home) and earn a good profit. Investors could see the money they could earn from mortgages, so they would buy the mortgages from the banks so the profit or return goes over to the investor.
The response of the Federal Reserve towards the terrorist attack of 2001, was to lower interest rates down to 1% to have a more stable economy. Usually this is where investors would invest their money, but due to the low interest rate most investors looked for different places to invest their money. This also affected banks since a good amount of them were dependent on the Federal Reserve in borrowing money, but due to the low interest rate most turned to different sources. A few examples of the other sources were China, Japan, and the Middle East. There was an abundance of cheap credit in these certain parts, so banks were able to borrow and make very good profit due to leverage. Leverage is “the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment” (Leverage, n.d., para.1).
Chapter Summary
I. What is a mortgage: Defines the fundamental concepts of mortgages, including various rate types and the standard requirements lenders impose on borrowers.
II. What is a subprime mortgage: Explores the mechanics of subprime lending, highlighting its role as a high-risk financial instrument for individuals with poor credit.
III. The Crisis: Analyzes the 2008 financial collapse, discussing the bankruptcy of major institutions, the impact on citizens, and the subsequent government response.
IV. The results of it happening again: Investigates the ongoing economic risks, the probability of future disasters, and potential strategies for economic recovery and stability.
Keywords
Subprime Mortgage, 2008 Financial Crisis, Housing Market, Federal Reserve, Foreclosure, Credit Score, Leverage, Bankruptcy, Investment Banks, Economic Recession, Interest Rates, Debt, Stability, Unemployment, Borrower Risks.
Frequently Asked Questions
What is the core focus of this research paper?
This paper examines the 2008 subprime mortgage crisis, exploring how it originated, why it impacted the global economy, and the measures taken by governments to mitigate the fallout.
What are the primary themes discussed?
The themes include the definition and types of mortgages, the systemic flaws in subprime lending, the resulting 2008 financial collapse, and long-term recovery strategies.
What is the primary research goal?
The goal is to understand the mechanics of the subprime mortgage crisis to help readers identify similar financial risks and understand potential survival strategies in volatile markets.
Which scientific or analytical method is utilized?
The author employs a descriptive and analytical approach, drawing on historical financial data, definitions of lending instruments, and case studies of institutional bankruptcies like Lehman Brothers.
What topics are covered in the main body?
The main body covers the anatomy of a mortgage, the specific dangers of subprime products, the chain reaction of the 2008 financial collapse, and the ongoing debate regarding economic resilience.
Which keywords best characterize the work?
Key terms include subprime mortgage, financial crisis, housing bubble, foreclosure, interest rates, and leverage.
How did "betting against the market" contribute to the survival of some entities?
Some investors and hedge fund managers identified the impending housing collapse and used "shorting" strategies to profit from the declining value of mortgage bonds.
What is the author's stance on the likelihood of a future crisis?
The author argues that while the economy is currently more stable, the conditions that led to the 2008 collapse could recur if strict regulations are not maintained and if subprime lending practices persist.
How did the government attempt to stabilize the system?
The government implemented various measures, including the Emergency Economic Stabilization Act, bank deposit insurance increases, and direct investments into banking institutions to prevent total systemic failure.
- Citar trabajo
- Jeremiah Cristobal (Autor), 2017, The Subprime Mortgage and its Effects, Múnich, GRIN Verlag, https://www.grin.com/document/1043474
