The US Mortgage Crisis at the beginning of this millennium


Term Paper (Advanced seminar), 2012

10 Pages, Grade: 2,5


Excerpt

TABLE OF CONTENTS

I. INTRODUCTION

II. CAUSES OF MORTGAGE CRISIS

III. WHAT CAN BE DONE

IV. REFERENCES

I. INTRODUCTION

The United States mortgage crisis was one of the primary indicators of the financial crisis at the beginning of this millennium, characterized by an increase in subprime mortgage account receivables and foreclosures, and follow-on by a decline of securities.

Due to this crisis many investment banks went bankrupt for instance Lehmann Brothers.

The proportion of lower-quality subprime mortgages originated rose from the originally 8% to approximately 20% from 2004-2006, with much higher ratios in some parts of the United States.

These subprime mortgages were well-liked in the United States and were one of the only options for many immigrants to own their dream house in the United States.

A high percentage of the mortgages, over 90% in 2006, were adjustable-rate mortgages. This was part of a broader trend of lowered lending standards and higher­risk mortgage products.

Furthermore United States households had turned out to be increasingly indebted, with the percentage of debt to disposable personal income rising from 77% in 1990 to 127% at the end of 2007.

After United States house sales prices got to its highest in mid-2006 and began their abrupt decline, refinancing became more difficult.

As adjustable-rate mortgages started to retune at higher interest rates, which was causing higher monthly payments, mortgage delinquencies raised.

Securities assured with mortgages held by financial firms lost most of their value. Global investors also radically condensed purchases of mortgage-backed debt and other securities as part of a decline in the capability and motivation of the private financial system to support lending.

Solicitudes about the reliability of United States credit and financial markets led to lessening credit around the world and slowing economic growth in the United States and Europe.[1]

II. CAUSES OF MORTGAGE CRISIS

The pressing cause of the crisis was the explosion of the United States housing bubble in 2005. High non-attendance rates on adjustable rate mortgages began to increase quickly thereafter.

In order to understand the full scope of the crisis one needs to comprehend the meaning of subprime mortgage loans.

The loans are fundamentally characterized by a certain repayment structure.

During the first two years the repayment rates stay static for the duration of the next two years the repayment amount is twice as high.

Thereafter the interest rate changes from a fixed rate to a modifiable rate mortgage which depends on the federal rate.

A boost in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume complicated mortgages in the belief they would be able to quickly refinance at more favorable terms.

Additionally, the economic incentives provided to the originators of subprime mortgages, along with outright fraud, increased the number of subprime mortgages provided to consumers who would have otherwise qualified for conforming loans. [2] Interest rates began to rise and housing prices started to drop moderately in 2006­2007 in many parts of the United States, refinancing became more difficult.

Defaults and dept enforcement increased dramatically as easy initial terms expired, home prices failed to go up as anticipated.

In the years leading up to the crisis, noteworthy amounts of foreign money flowed into the United States from fast-growing economies in Asia and oil-producing countries.

This inflow of funds combined with low United States interest rates contributed to trouble-free credit conditions, which fueled both housing and credit bubbles.

Loans of various types for instance mortgage, credit card and car loans were easy to obtain and consumers assumed an extraordinary debt load.

[...]


[1] http://www.ncuf.coop/media/CUNAWhitePaperRespondinaToMortaaaeCrisis1-31-Q8.pdf

[2] http://www.investopedia.eom/ask/answers/Q7/subprime-mortaaae.asD#axzz1bm2ZYiDh

Excerpt out of 10 pages

Details

Title
The US Mortgage Crisis at the beginning of this millennium
College
Berlin School of Economics and Law  (IMB)
Course
MBA Seminar
Grade
2,5
Author
Year
2012
Pages
10
Catalog Number
V207984
ISBN (eBook)
9783656353430
ISBN (Book)
9783656354314
File size
433 KB
Language
English
Tags
US Mortgage Crisis, Financial Crisis, Financial Strategy
Quote paper
Judith Zylla-Woellner (Author), 2012, The US Mortgage Crisis at the beginning of this millennium, Munich, GRIN Verlag, https://www.grin.com/document/207984

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