Subprime mortgage crisis- what triggered it?
Subprime mortgage crisis struck roots in the US few years ago but it assumed a bigger proportion in 2007-2008. It affected all the major economies of the world and although there is news in bits and patches that the economy is recovering, it is difficult to establish the same unless a particular positive factor lasts for few weeks so that it can be called a trend.
What caused subprime mortgage crisis?
There were many borrowers that had taken out mortgages way back in the 2000-2005 at subprime rates. However, as they failed to make payments for the mortgage, they had to lose their homes in foreclosure. During the housing bubble, when the prices of homes escalated, consumers were successful in getting mortgages approved at lower rates. The main aim of taking out such loans was to get access to the equity that would increase if house prices increased by refinancing.
Nevertheless, there was something different in store for these borrowers. With the bursting of the housing bubble in 2005, the price of homes began to drop. Those borrowers who had taken out mortgages with adjustable-rate mortgages couldn’t afford to make payments. This led to foreclosure. And it was found that suddenly borrowers owned a property whose value was much less than the mortgage they owed.
Although the Obama Administration stepped in to save the mortgage market from going down the dungeons, not many homeowners were saved from the crisis. The first mortgage bailout program popularly known as Making Home Affordable Plan was expected to help as many as 7 to 9 million homeowners. Unfortunately, many homeowners failed to derive benefits as not all homeowners qualified for the mortgage bailout program. Another reason why homeowners failed to receive help was due to the fact that the program failed to address mortgage needs of homeowners with secondary mortgages.
Several mortgage bailout programs were introduced in quick succession each time to address a lacuna that was found in the previous plan. Two main highlights of the Federal Government’s effort in nullifying the effects of subprime mortgage crisis were refinancing and loan modification.
Subprime mortgage crisis – the aftermath
All sectors of the economy were affected. It gave rise to liquidity crunch and to prevent further financial loss, lenders became stringent in lending activities. To add to the financial mess, credit card debts escalated as the credit card issuers altered their payment policies and reduced credit limits to the utter dismay of consumers. As unemployment rates took an upward swing, consumer spending and investor sentiment was affected negatively. All this led USA to be a debtor nation as compared to its status of a creditor nation prior to subprime mortgage crisis that shook the economy of United States of America and also sent ripple effects to all economies around the globe.
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