Subprime Mortgage Crisis

Crisis has gripped the American economy. Currently it is spiraling into potentially the worst economic descent the United States has ever seen. The similarities between the great depression and the mortgage crisis now halting the economy are undeniable. The widespread destruction of the great depression will undoubtedly occur if nothing is done to curb the effects of fraudulent loaning practices, to regulate the way banks operate when selling loans to other corporations, and to stop the harmful practice of investing in the housing market on money borrowed from banks. It is hard to believe that no one had the foresight to discover what effects these practices have had. The collapse of an entire economy could have been prevented by better educating regulators of the dangers of subprime lending and consumers of why these subprime loans are less attractive than they appear at first glance.
Initially, subprime loans were seen as a blessing to the American economy. The amount of subprime mortgages had grown from almost zero in 1993 to 625 billion dollars in 2005 at the peak of the housing market. These loans, designed especially for low income families made up mostly of minorities, had increased the homeownership in America from 64 to 69 percent. The introduction of subprime loans caused the housing market to boom (Gramlich). Housing prices soared. For those lucky enough to ride the housing wave to its peak and estimate its collapse a fortune was made. But the case for so many others, including the poor minorities that subprime loans preyed on, the results were to come out homeless and in greater debt than ever before.
A subprime mortgage is a loan with high interest rates. These loans are designed for people who would not normally qualify for a home loan (Immergluck). The bank issues these loans knowing that they will be at high risk for delinquency in payments. Knowing this the bank takes several steps to ensure that they receive compensation for the loan it issued. High interest rates are put in place to regain as much of the assumed risk as quickly as possible. These rates are also adjustable and continue to go up as other market rates increase. Consumers could purchase these loans without putting a down payment on their house. This meant that they had no equity, or value, in their house. This means that the consumer was paying a loan for a home that was essentially worthless (Neal).
In 2005 housing prices across the United States began to drop. Those who took out loans of large amounts of money for a home that had little or no value in it saw difficulties when trying to pay their mortgages. When housing prices dropped homeowners began to pay more for their home than it was worth at current market value (Gerardi). The low intrest rate subprime loan that they had originally taken out in hopes to refinance two years later at a low fixed rate was now their only option. They did not have enough value in their home to refinance. They were now stuck in a high interest adjustable rate mortgage with no way out. These homeowners could not make the payments on their mortages and were forced to default. In Massachusetts 44 percent of 2006-2007 foreclosures were due to borrowers who had paid for their homes with a subprime loan (Gerardi). Current homeowners now faced even worse problems.