The subprime mortgage crisis is a series of events and conditions that lead to the 2008 global financial crisis, which has caused the worst recession since Great Depression. The subprime crisis has made the five biggest investment banks become history and reduced thousands of American citizens begging on the street corners without a place to lay their heads. There is a proverb in China, “One can cope with the future by viewing the history”. Therefore, by reviewing the main causes of the subprime mortgage crisis and the impact it had on the global economy, we can figure out ways of avoiding a future crisis.
* Roots of the subprime ...view middle of the document...
Traditionally, the mortgage market set minimum lending standards based on a borrower’s income, payment history, down payment, and the local underwriter’s knowledge of the borrower. Subprime lending is a relatively new and rapidly growing market that expands the business to embrace the borrowers who, for a variety of reasons, would be denied credit. However, these borrowers have to bear much higher interest rates compared with prime mortgage.
The value of American subprime mortgages was estimated at $1.3 trillion as of March 2007(Associated Press, “How severe is subprime mess?”), with over 7.5 million first-lien subprime mortgages outstanding(Ben S. Beranke, “The Subprime Mortgage Market”). Between 2004-2006 the share of subprime mortgages relative to total originations ranged from 18%-21%, versus less than 10% in 2001-2003( Mjperry.blogspot.com, “The Rise and Fall of the Subprime Mortgage Market”).
By October 2007, approximately 16% of subprime adjustable rate mortgages were either 90-days delinquent or the lender had begun foreclosure proceedings, rougly triple the rate of 2005.(Ben S. Bernanke, “The Recent Financial Turmoil and its Economic and Policy Consequence”) By January 2008, the delinquency rate had risen to 21%.(Ben S. Bernanke, “Financial Markets, the Economic Outlook, and Monetary Policy”) And by May 2008 it was 25%.(Ben S. Bernanke,...