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The Foreclosure Crisis In America And Anticipation Of A Difficult Recovery

1063 words - 4 pages

The foreclosure crisis has been and will probably always be a problem facing the American population. Even if it has recently begun to be a major problem for the US as well as the global economy, it hasn’t simply sprouted out overnight. A major spark that created this crisis was the housing boom; in fact it was because of this boom that it began to take form. Since people were working for their money in the 90’s, mortgage lenders decided it was the best time for making the most money, to do this they used what is called a subprime mortgage loans to give to everyone who walked into their office, with or without proper qualification (a qualified person being one with an income to debt ratio of around 30 percent). These mortgages consisted of a “fixed” low rate for a number of years and then raised 100 percent or more in the years following, and adding fuel to the fire was the fees which the loan companies imposed on defaulted mortgages, making it almost impossible to afford the monthly payment, and were the main reason for the horrible crisis that would ensue. These homeowners would them take out equity loans in order to make some extra cash in order to keep their heads above water financially, which instead worsened their situation as the housing market started its decline. While the people who had acquired the undesirable loans were suffering enough on their own, banks and other institutions began to add fuel to flames by handing out CDOs, or collateralized debt obligations. These CDOs would contain as many as 100 subprime mortgages and were distributed worldwide to many different investors, in order to cover the debt that homeowner were accumulating. These actions set up a terrible domino effect; the more homeowners went into defaulted mortgages, the more investors would have to endure, which, in turn, would injure the global market due to a decrease in activity by the investors. This didn’t however impact the economy horribly that it would lead to a recession. In 2007, a major company by the name of Bear Stearns Hedge Funds closed two of their offices which affected parts of the financial market worldwide. The number of foreclosed houses due to these loans also increased between August and September of that year which critically froze the money market for the banking and financial operations. The Federal Reserve and European Central banks gave $100 billion in liquidity to calm the market but it only soothed the storm for a short while. The market then stayed sound for a while as the house prices continued its increase and interest rates remained the same. However, during this entire time more and more citizens were being laid off or demoted which made it even harder for them to make any sort of payment on their already faulting loans. As the country got closer and closer to a recession and more and more jobs were lost the more houses were foreclosed which resulted in the declining of housing prices.
Presently the problem is not getting any...

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