The U.S. housing bubble that developed from 1999 to 2006 was the result of actions by both potential homeowners and lenders. Among the important catalysts of the Housing Bubble of 2007 are subprime loans, the banks entering into the mortgage bond market, government policies aimed at expanding homeownership, speculation by many home buyers, and the predatory lending practices of the mortgage lenders, and in addition the moral hazard at the core of many of the causes.
One of the greatest culprits to the Housing Crisis was the relaxed laws in lending regulation, starting with subprime lending. Subprime lending refers to the practice of making loans to borrowers who do not traditionally meet credit underwriting standards. In general, subprime borrowers have poor or limited credit history.Since these loans involve greater risks, the interest rates and loan fees on these loans are higher. Borrowers obtain subprime loans from financial institutions that specialize in subprime lending or that deal with subprime loans as part of their broader business. However, many institutions who deal in subprime loans are not under the control of banking regulators and securitize their mortgages by packaging mortgages into securities or bonds that are sold in the secondary markets to banking investors. This allows lenders with the cash flow to fund additional lending and so investment banks increased their purchases of mortgages to enable them to issue more and more of the highly profitable mortgage-backed securities. This competition in the mortgage industry contributed to relaxed mortgage standards. In many cases, mortgage lenders were willing to lower their standards could gain market share; however, others had to lower their standards or lose market share.
However, the relaxed mortgage policy was not only a function of economic benefit, but for political and social reason, some of which include: new governmental policies aimed at fostering an increase in homeownership rates among lower-income households, the increasing securitization of home mortgage debt, and the 'irrational exuberance' that engulfed all parties involved in the mortgage lending process.
But, because subprime lending tends to involve minority, elderly, moderate-to-lower income or less-educated people whose need for credit makes them vulnerable, the subprime market is susceptible to abusive lending practices. While subprime lending is not the same as predatory lending. Predatory loans, while they may involve subprime borrowers, are not directed at a single class of borrowers and are typified by a lack of exchange of fair value or loan prices that exceed the risk that a borrower presents. This led to unprecedented growth in house prices. It also resulted in high default rates and the housing crisis. As applicants for mortgages were not carefully examined and were encouraged to obtain subprime loans.
Yet many people did not understand the type of loan they were taking out an in many instances could afford an adjustable-rate mortgage short-term, but not long term as the interest can be changed, with low rates at the beginning and high rates at the end. A variation of the adjustable-rate mortgage is a balloon mortgage. Lower payments are made on a loan for five to ten years, with a final installment, or balloon payment, that is significantly larger than earlier payments. Most borrowers could not afford to pay the balloon payment. In this regard, people were defiantly taken advantage of, in my opinion.
However, the greatest issue of sustainability and justice, or lack thereof, is the lack of accountability. Banks and investors did not have enough skin to loose by the failing of any one loan to care if it was good or not, because ultimately that loan or mortgage is sold to another party. They did not care about the signer, as they did not care if they were knowingly going to hang them out to dry. But is this solely the banks fault? What about the responsibility of the homeowner? If you are going to take out a loan for several thousand, even several hundred thousand, you better understand the responsibility associated with it. It is the individuals responsibility, just as it is a moral obligation on the lenders to issue affordable loans. But this is where American consumerism and capitalism falls short, we do not care about the long term. We care about making the sale, living in the moment, and if we make a buck now, who cares about in a year or two, who cares about the people who have defaulted on their loans or have lost their homes? Our greatest issue of sustainability is our inability to see futuristically. In addition, this disproportionally effected middle and lower class Americans. As argued in Part One, to create a more socially justice community, we must redistribute, in this case, 'bads' over the entire population and distribute the 'goods' that prevented the upper class from being hit as hard as they did, such as education.
Furthermore, the housing crisis bled to the Financial Collapse of 2008. The global financial crisis of 2008'2009 ushered in the most severe global recession since the Great Depression. Given the central role played by finances in globalization, the crisis has serious implications for virtually all global issues and for globalization itself. Although it is argued that the financial crises seem to be an integral component of capitalism, human beings are ultimately responsible for creating them. Revolutions in computer and telecommunications technologies fostered the development of complex financial engineering that radically altered the global financial system. An emphasis on government deregulation, the growth of a culture that encouraged quick profits and excessive executive compensation, and the availability of low interest rates played significant roles in creating the financial crisis.
While the United States has suffered severe setbacks like significantly reduced global trade and caused unprecedented home foreclosures and high levels of unemployment. China, for example, has gained global power.
However, is the financial crisis was unraveling, it brought to light that many involved in the banking and investment communities did not fully comprehend how the financial system they created functioned, or the scope and severity of the crisis. The so called financial wizards, the best and the brightest could not explain what was happening on Wall Street and in global financial markets. Financial innovations, with instantaneous global impacts due to technologies that made electronic transactions faster and less expensive, raced ahead of regulations. Complex financial products created in one financial center involved assets in another and were sold to investors in a third financial market.
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