The Subprime Mortgage Crisis

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The Subprime Mortgage crisis
ECO 2072 Principles of Macroeconomics

In the beginning
One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage opened a new door for those looking to accomplish the “American dream”. “Since, 1998 more than 7 million borrowers bought homes with Sub-prime loans. One million of those homeowners have already defaulted on their loans (Atlas , 2007).
The of Rise Subprime Lending There are two types of mortgages in the U.S.: fixed-rate mortgages (FRMs), which allow a fixed amount of interest for the duration of the loan, and the adjustable-rate mortgages (ARMs) are loans with variable interest rates. Subprime mortgages are a combination of both FRMs and ARMs, because they provide for a fixed rate for the first 2-3 years as “teaser-rate”, following this period the interest rate becomes adjustable semi-annually (Kirk). Subprime mortgage is a type of mortgage that is normally made out to borrowers with lower credit ratings (often below 600), who, as a result of their deficient credit rating, would not be able to qualify for conventional mortgages. These loans are characterized by higher interest rates and less favorable terms in order to compensate for higher credit risk. Investors/homeowners receive the funds to make these purchases from banks…...

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