Subprime Mortgage Loans

Dakota Keller
ECON 2020
12/10/15
The recent recession has not yet been forgotten much like the
homes that sit vacant all across the United States. One issue that
made the recession even worse was the housing market crash, along
with all the bail outs that the government created. If they would not
have bailed out some of the larger corporations such as Fannie Mae
and Freddy Mac the whole financial system would have crumbled
completely.
Fannie Mae and Freddie Mac is a large corporation that invests in
mortgage loans. They were bailed out along with other large
companies to keep the financial system afloat during the recession.
The massive amount of subprime mortgage loans that ended up going
into default worsened the recession substantially. Subprime mortgages
are loans that people apply for that have less than average credit, but
still want to finance buying a home. These types of loans require less
financial information to get, basically state your income and they
approve you. There was a lot less double checking of personal income
and buyers credit score, compared to now days. Most prime loans
these are what most home buyers have, required certain percentage of

total loan amount as a down payment or even assets that have equal
or greater value. Compared to the subprime loans most people could
get into this type of loan easily even if they knew that it was going to
be quite a juggle with their current income.
These high risk and low credit home buyers were charged high
interest rates for their home loans, this is what makes them so called
subprime or below prime mortgage loans. Most of these loans were
packaged together by banks or investment firms then resold so the
banks could get out from under the loans. According to Jonathan Swift
writer of Lest We Forget: Why We Had A Financial Crisis believes that
the banks that created these toxic groupings undoubtingly crushed
the financial market even more. They sold loans that they knew were
high risk and essentially suckered the next guy into an investment that
would not produce as they had hoped. These toxic bundles became
what was called mortgage backed securities, these were a good
investment until the home owners could not make their mortgage
payments due to layoffs and declining housing values the investors
started losing money exponentially Swift.
The whole recession was one bad thing after another all of them
playing into the worst of each situation. Some people saw what was
happening and tried to speak up, but they were ignored and sidelined

in the rush for money according to Matthew Hancock and Nadhim

Zahawi. This shows that people saw what was going to turn into a
terrible situation by ignoring the facts. In turn we fell apart as a nation,
with the large corporate bailouts furthering our debt. The decision for
congress to loosen the lending laws was not a good idea as it allowed
for highly risky investing by banks that compromised the financial
system.
The subprime mortgage were good idea to get more people into
houses and grow the housing market, but with people being laid off
due to slow economy they could not make their payments. If the
economy had not have required companies to down size their business
the home owners would probably have been able to keep their houses.
The loans today are harder to get approved and require a down
payment up front; essentially it shows the bank that you are financially
a sound investment for their own interest. This is a much safer way to
finance loans versus entering into a 30 year loan. Financing the whole
loan amount the payment difference has to be ridiculously high for
those subprime borrowers at such high interest rates.
The recession was partially self-inflicted by risky loaning practices
across the nation. Hopefully in the future the lending laws will not be
bypassed. They are set in place to protect the lenders and borrowers to

create a stable financial system. This recession hit all Americans as

they saved every penny they could as no one knew when it would
recover. History repeats itself as this is not the first economic disaster
we have encountered, let us hope that we will be better prepared for
the next of its kind.

Works Cited

Duca, John. "Subprime Mortgage Crisis - A Detailed Essay on an

Important Event in the History of the Federal Reserve." Subprime
Mortgage Crisis - A Detailed Essay on an Important Event in the History
of the Federal Reserve. Federal Reserve History, 22 Nov. 2013. Web. 8
Dec. 2015.
duca
Hancock, Matthew, and Nadhim Zahawi. Masters of Nothing How the
Crash Will Happen Again Unless We Understand Human Nature.
London: Biteback, 2011. Print.
Matthews, Chris. "The Subprime Mortgage Crisis Wasn't about
Subprime Mortgages." Fortune The Subprime Mortgage Crisis Wasnt
about Subprime Mortgages Comments. Fortune, 17 June 2015. Web. 8
Dec. 2015.
matthews

Swift, Jonathan, and Steve Denning. "Lest We Forget: Why We Had A

Financial Crisis." Forbes. Forbes Magazine, 22 Nov. 2011. Web. 8 Dec.
2015.
swift