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The Subprime Mortgage Crisis And What To Do About It

2837 words - 12 pages

The Subprime Mortgage Crisis and What to Do about It
A Review of the Literature
The fuse for the subprime financial shock was set early in this decade, following the tech-stock bust, September 11th, and the invasions of Afghanistan and Iraq. The subprime mortgage crisis is a historic turning point in our economy and our culture. The disruption in our credit markets is already of historic proportions and will have important economic impacts. More importantly, this crisis has set in motion fundamental societal changes – changes that affect our consumer habits, our values, our confidence to the future, and our psychological status. After this financial crisis, our economic went downturns ...view middle of the document...

The private mortgage market can be sliced in numerous ways; the most obvious is based on borrowers’ credit scores. The market distinguishes between prime and subprime borrowers using such scores, which reflect how an individual has managed his debts in the past (Zandi, 2009, pp. 31-32). In the credit score system, scores are derived using statistical techniques based on information in borrowers’ credit files. Borrowers with a record of late debt payments receive a lower score. Borrowers with a lot of credit cards and other financial obligations receive lower scores, as do borrowers who actively use most of the credit lines available to them. According to Zandi, no credit score officially distinguishes a prime borrower from a subprime borrower, but most lenders and regulators consider someone with a score of less than 620 subprime (2009).
“The subprime mortgage was developed to accommodate borrowers who could otherwise not have access to more conventional mortgages. The creation of a subprime mortgage implies a deterioration of underwriting standards” (Sengupta & Noeth, 2010). In other words, the subprime mortgage is to lower the credit standards lending mortgage to people with poor credit score. That means the probability of those borrowers not able to pay the mortgage is high.
The subprime market is largely defined as one meant for borrowers of modest credit quality. Naturally, it is widely believed that in order for this market to grow, it had to lower its standards and serve borrowers of even poorer credit quality (Bhardwaj & Senguata, 2010). People with poor credit score are usually have low income. They buy houses that they are not able to afford. The brokers who are selling the mortgage are very clear about those buyers’ credit issues. However, because they intend to enlarge the subprime mortgage market and make money, they will still sell the houses to those people (Hudson, 2010). When more and more house mortgages are approved to those people who cannot afford to buy houses, the subprime mortgage crisis is brewing.
How was the subprime mortgage crisis happened?
The problems in the subprime mortgage market began to show up in the United States in 2007 and then spread to other countries. Home prices and homeownership had been booming since the late 1990s, and investing in a house had seemed a sure route to financial security and even wealth. U.S. homeownership rates rose over the period 1997-2005 for all regions. According to the U.S. Census, the homeownership rate increased from 65.7% to 68.9% (2005). Encouraging homeownership is a worthy and admirable national goal. It conveys a sense of participation and belonging, and high homeownership rates are beneficial to a healthy society. But the subprime housing dilemma in the United States points up problems with over-promoting homeownership (Shiller, 2008, pp. 51-53). Mortgage originators, who planned to sell off the mortgages to securitizes, stopped worrying about repayment risk....

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