The Mortgage Melt Down - Mortgage Crisis Essay Example

The subprime mortgage crisis and meltdown led to one of the worst recessions America has ever faced. It all started with the housing bubble and subprime borrowers. Prior to 2008 mortgages where highly unregulated. Anyone and everyone could obtain a no document loan, which did not factor the borrowers ability to repay; it was primarily based on a credit report and an appraisal. A borrower could obtain multiple loans for multiple properties. With an increasing amount of homebuyers, the supply of homes became low, causing an over evaluation of homes. When the adjustable rates kicked in borrowers could no longer afford their mortgages, leading to a tremendous amount of defaults causing the housing bubble to burst leaving the loans secured by the dwelling worthless. Subprime loans became possible because of mortgage back securities and the scrutinization process, and because the government deregulated it. Rating agency responsible for determining the risk of the collateralized debt where dishonest and gave excellent ratings to horrible mortgages. The mortgage meltdown and recession would have been avoidable if mortgage brokers, bankers and rating agencys conducted business with a fiduciary duty and documented a subprime borrowers ability to repay.

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A subprime loan is a loan made to higher-risk borrowers with lower income or lesser credit history than prime borrower. The borrowers behind these mortgages typically have clean credit histories, but the mortgage itself generally will have some issues that increase its risk profile. These issues include higher loan-to-value and debt-to-income ratios or inadequate documentation of the borrower's income. Stated income loans allowed a borrower to obtain a loan without providing documentation to validate the income stated on the application to finance home purchase. This drastically increased the amount of interest only and adjustable rate mortgages being originated. Mortgage bankers and brokers would profit more on subprime loans, putting their interest before the borrowers. In 2004 just 80 percent of all mortgages initiated in in 2004 were an adjustable-rate, and 47 percent were interest-only loans. There was a significant increase in the amount of money that was available through cash inflows from developing Asian countries and oil producing countries in the years leading up to the crisis. The people took up loans and mortgages while companies used Mortgage Backed Securities to fund these loans. Once there were a lot of credit defaults in the system the economic system in the country started crumbling. The level of subprime mortgage loans that had been taken were too high making it impossible to contain the level of fall-out from the financial system in the US hence the massive effects of the financial and mortgage crisis in 2008. It is however, important to assess the major reasons that led to a high level of subprime mortgages in the US that was so severe that it led to the effects on the US financial crisis.

There were different factors that contributed to the subprime mortgages that were handed out to people in the US. One of the main aspects that was critical was the ratings by major insurance firms that had given AAA ratings to people who did not meet these ratings. AIG was one of the companies that was severely affected by the ratings that it had identified and required the government to bail it out. The government had to take up the mantle to bail out the company since most of its models were drawn from credit default swaps. AIG was a major entity in the evaluation processes that regarded the real estate securities with an AAA rating therefore, there were no problems that could be identified under these credit models. The real estate was valued as a secure mortgage and risk free model therefore, there was no need for collateral. The same model was adopted by many companies in the US financial sector that were not effectively monitored especially the hedging companies thereby, increased the level of risks once the companies faltered. There were different models that were adopted by the companies in an attempt to change the models that were appropriated thereby making it critical to develop individual structures and models that were critical in the level of control and models adopted by the copany. AIG and other major companies in the insurance and hedging sector had adopted models that were critical in employing better structural aspects that were defined by the societal structures thereby creating a working principle that was important for companies involved in these models. The government was particularly at fault for its policies and monitoring controls that were identified as insufficient in controlling the eventual models that were identified in the processes and models adopted.

The government is faulted for its role in the financial crisis an aspect that led to an increased level of control and models that were appropriated by the people and government in general. There was overregulation, failed regulation and deregulation that was critical at identifying the individual models and attributes that were critical in the crisis. The government did not institute policies and models that would have helped in reducing the level of controls and models that were observed in the society during the crisis. The US had hedging as well as insurance firms that were deregulated and were not appropriately monitored by the government. The government had allowed different companies that were deemed as being too large to fail to reduced controls. There was a difference between the models that were adopted by these companies and the overall structures that were adopted by the companies in the long-run. Since the companies had the freedom and basis to conduct their businesses freely in a market where mortgages were appropriated the companies were able to loan out funds indiscriminately. There was no collateral or securities that were charged on individuals taking up these mortgages. The level of shadow banking that was evident in this case was massive with many people taking up loans that would eventually be used for mortgages. The main strength and basis for these loans was the fact that companies deemed these processes with a high level of rating thereby deeming it immune to any form of default since the mortgages would be sold at a lower value. However, with the mortgages taking a deep dive and the level of defaults increasing considerably there was no chance to recover and the government had to ensure that it bailed out the strong financial institutions from the crisis. There are many financial analysts that analyze of the Fannie Mae and Freddie Mac in the crisis. It is one of the models that has been analyzed and believed to be a major model that was critical in developing the best basis for the models that were critical in giving the people the level of mortgages and was implicit in increasing the level of risks in the country accordingly.

Freddie Mac and Fannie Mae were government Sponsored enterprises that purchased mortgages through buying and selling mortgages that were available in the US. There was a differentiated model that was adopted that was critical in giving the people the level of control and modelling that was critical in this society. The enterprise advised the government to purchase the high risk mortgages in the society, giving a chance for the people to create a working model that was critical for individuals in the larger market. The enterprise was also acting on pressure from the political sphere and investment banks and mortgage lenders who were looking to seize the opportunity and take up the mortgages. Since most of the mortgages that were being sold in the market were believed to be AAA rated the enterprise was confident that the purchased mortgages would return the level of investment that was directed to its fruition. There was a level of control and models that were directed by the company as it advised and acted as an indicator for other financial organizations to delve in the same business. However, due to the housing bubble it was noted that the social constructs and models that were identified were not perfectly positioned to take advantage of the models appropriated. Although people direct the blame towards the company it is important to note that the company did not have a lot to do with the crisis and its integral aspects that were later derived. The company was perfectly positioned to take advantage of individual models thereby creating a workable approach that was critical in giving a chance to the people to make the best decisions based on the factors on the ground. The effects of the problem on Wallstreet was also massive as there were models that were critically established through an interpretation and judgment of the market that was not accurate. It was therefore, important to ensure that the government developed models that could be used in future to ensure that a similar case would not be witnessed in the US.

In conclusion, the economic crisis in the US revealed a lot of loopholes that were evident from the different policies and models used in the country. The financial institutions as well as the government were at fault and better models needed to be employed. The government has taken steps to ensure proper controls and modelling of these factors and the mortgage crisis that was evident in the society has been critically assessed and measures taken to reduce any form of recurrence in the US.

Works Cited

Bianco, Katalina M., and (c) 2008, Cch. All Rights Reserve. The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown (n.d.): n. pag. Web.

Demyanyk, Yuliya, and Otto Van Hemert. "Understanding the subprime mortgage crisis." Review of Financial Studies 24.6 (2011): 1848-1880.

DU, Hou-wen, and Chun-li CHU. "The US Subprime Mortgage Crisis: Origin, Prospect and Impact [J]." Journal of Renmin University of China 1.010 (2008).

Reinhart, Carmen M., and Kenneth S. Rogoff. Is the 2007 US sub-prime financial crisis so different? An international historical comparison. No. w13761. National Bureau of Economic Research, 2008.