Analysis of Mortgage Crisis Research Paper Example | Topics and Well Written Essays - 1000 words

Analysis of Mortgage Crisis - Research Paper ExampleThe roots of the current US subprime impart crisis can be traced back to the spiraling housing prices in the first one-half of this decade. Extremely low lending and borrowing rates increased the demand and supply of existing and new houses. Several institutions started whirl subprime mortgages, to borrowers who had an unfavorable credit history, at lower than normal repayment interest levels with little or no down payments. Many investment banks and hedge memory owners began to bet on this new aspect of the US economy. This had allowed investors to avail themselves of loans at low interest rates and invest them in higher yielding avenues. only when soon with the US Central Bank (Federal Reserve) initiating a series of interest rate hikes leading to the increase of cost of borrowing to 5.25%, which is the maximum since the last half a decade, and a simultaneous decrease in housing prices, the subprime mortgages were reset at hi gh rates leaving the borrowers to foreclose their accounts and miss payments. As an outcome, financial institutions and banks with mortgage securities incurred huge losses and had to trade their assets leading to the subprime lending crisis. Prime debtors are the ones who are considered creditworthy. Subprime debtors are the ones with impaired or no credit history. Subprime lending can be defined simply as lending that involves higher credit risk. While prime loans are typically made to borrowers who have a strong credit history and can demonstrate a capacity to repay their loans, subprime loans are typically made to borrowers who are perceived as subscript on either or both of these grounds. Since this involves the risk of non-payment by the client, it is usually offered at a higher interest rate. The subprime mortgage financial crisis refers to the sharp elevator in foreclosures in the subprime mortgage market that started in the US in 2006 and became a global financial crisis in July 2007. The subprime lending storm did not intercept out overnight. The clouds had been gathering strength for the past few years. Low-interest rates and ample liquidity led to unbridled credit expansion, asset growth and an increase in demand for collateralized debt.