Sub Prime Mortgage Crash

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Sub Prime Mortgage Crash

The US sub-prime mortgage crisis has led to plunging property prices, a slowdown in the US economy, and billions in losses by banks, and the main reason behind it stems from a fundamental change in the way mortgages are being funded. Traditionally, banks financed their mortgage lending through the deposits that they receive from their customers, and in turn these customers are charged with the prime rate, which is the interest rate, that commercial banks charge to their most creditworthy customers, which limits the amount of mortgage that the banks could do (Evans-Pritchard 225-634). However, with the private sector dramatically expanding its role in the mortgage bond market, which had previously been dominated by government-sponsored agencies such as Freddie Mac, banks decided to move to a new model, the Sub-prime model, which sees them selling on the mortgages to the Bond Markets, making it easier to fund additional borrowings.

These private sectors specialized in new types of mortgages, such as sub-prime lending to borrowers with poor credit histories and weak documentation of income, who were shunned by the "prime" lenders like Freddie Mac. With banks earning a fee for each mortgage they sold on, these businesses proved to be extremely profitable for the banks who then urged mortgage brokers to sell more and more of these mortgages. Mortgage brokers then decided to focus their efforts on selling sub-prime mortgages, and in the process, often neglecting to properly explain how the new sub-prime mortgages would "reset" after 2 years at double the interest rate (Stewart 45-97).

The sub prime mortgages had a much higher rate of repossession than conventional mortgages because they were adjustable rate mortgages. These Sub-prime loans are characterized by low “introductory” interest rates, usually for the first two years, with the rates rising rapidly in subsequent years, resulting in payments that can increase in hundreds of dollars each month causing home purchasers to default on their sub-prime mortgages as they simply did not have the income required to be able to make these increased payments. This scenario coupled with consumerism due to the fact that President George W. Bush has asked Americans to spend more money so as to get out of the economic slowdown was a result of a wave of repossessions that shattered neighborhoods across the city and the inner suburbs of the United States.

There have been many cases where a borrower's credits score had unwillingly been uplifted or false loan product information was provided to the borrowers to close a loan. Most of these fraudulent accusations have been made against mortgage lenders who were motivated to lend as much money as possible, as they earned the profit from lending service fees (Barnes 247-364). The actions of these lenders can basically be deemed as fraud as these lenders engage in a practice that, intentionally targets consumers with poor credit who need cash and may have equity in their homes, by offering them the new sub-prime mortgages, sometimes even failing to let the borrowers know ...
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