Believe it or not, the housing market
is improving. In September 2009, 14.4%
of all outstanding mortgages were either in delinquency or in foreclosure. Delinquency is the step before foreclosure in
which a borrower has failed to pay back the loans. So 14.4% of all homeowners already had, or were
just about to lose their home. This
number has fallen by 3.1% to 10.3%[1]. More people are now paying their loans on
time.
The largest contributor to the
housing crisis were subprime mortgages.
Rather than give only giving out loans to people with good credit or whom
could make a down payment, banks began giving loans to risky customers (the
young, poor credit, not much money in the bank) and these customers were not
able to pay their mortgages, setting off what has become known as the U.S.
Subprime Mortgage Crisis. The book The Greatest Trade Ever is about a
hedge-fund manager’s prediction and investment against these subprime mortgages
and collateralized debt obligations.
When the housing bubble finally burst in 2007, John Paulson became an
instant billionaire. The way he invested
against the subprime mortgages was through the purchase of Credit Default Swaps
(CDS), which are “instruments that rise in value as the risk of default increases”[2]. Similar to the subprime mortgages were the
adjustable rate mortgages. Interest
rates were initially set up at a rate people could afford and the interest rate
often “adjusted” to where people couldn’t afford the mortgage anymore.
In order to prevent a massive
economic collapse, the federal government passed the Troubled Asset Relief
Program (TARP) in 2008. This bill lent
billions of dollars to corporations affected by the financial crisis in order
to keep the corporations afloat.
Investment banks, banks, car manufacturers were all lent money to insure
the well-being of hundreds of thousands of workers and business. The investment banks that were covered under
TARP included J.P. Morgan, Bank of America and Wells Fargo. The purpose of investment banking is to
assist individuals, businesses and governments in the issuance of
securities.
Much has changed
since 2010. The government has gotten
most of the TARP money back, legislation has passed Congress tightening
regulations and the economy is on an upswing.
The number of delinquent or foreclosed mortgages is shrinking. But as we examine the past and we must
prepare ourselves for the future. We
must learn from these trials and tribulations of the Subprime Mortgage Crisis
in order to better prepare ourselves for what lies ahead. If we don’t, we will see 14.4% again.
No comments:
Post a Comment