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The Scary Truth about the Sub-prime Mortgage Crisis

Updated on October 19, 2013

What Caused This Crisis?

The economic downfall of recent years marked an epoch in history, in which previously affluent individuals had their financial status severely compromised. Specifically, this crisis encompasses a series of occurrences that prompted the recession in the year of 2008. During this period of economic struggle, there were a number of mortgage delinquencies and the rate of foreclosure essentially skyrocketed during this time period. There were a series of events, however, that gradually led to this time of financial woe. One of the major contributors to this crisis was the United States housing “bubble,” which had its heyday in 2005-2006. Many home mortgage lenders enticed prospective home owners with a variety of different incentives. Furthermore, home prices are elevated, making purchases less attainable. These combined factors encouraged many to embark upon mortgages that they simply could not afford. Pursuing these mortgages was not a shrewd choice, because they were associated with far too many risks.

How Did This Happen?

Hence, why did so many unassuming Americans embrace these risk mortgages? Firstly, the incentives were very captivating to them. And, instead of relying on foresight and the potential downsides of undertaking such a mortgage, they saw the incentives lying right before them, and they acted impulsively. Another reason why this occurred is because the very notion of home ownership is tied closely with the concept of the American Dream, especially in certain such as Lake Granbury real estate market. Hence, this alone led many astray, into a dangerous financial territory from which they could barely recover.

Other Contributors to the Housing Bubble

Another major reason why this crisis ensued is because America borrowed a staggering amount of money from foreign countries, especially those located in Asia. As a result of this, credit became increasingly attainable, allowing many to embark upon loans that they could not afford to pay back. This was also a significant contributor to the housing bubble. It is also important to note the rapid increase in home prices in the housing market. Along with this, many home purchasers began to engage in a common practice that proved to be one of the defining factors in this crisis. There is a concept referred to as flipping, in which an individual purchases a home and rapidly sells the home, or flips it for a profit, without ever having lived in the home. This type of practice was deemed economically damaging, especially if the new occupants could not afford the mortgage.

There are a variety of explanations behind the lax approach to home mortgage lending and home ownership. One such factor is that of poor government regulations. Because the government did not closely regulate certain financial institutions, they made it possible for them to entice unqualified individuals into a financial situation that they could not afford. By making their own rules and offering a variety of different incentives, they basically contributed to the housing bubble, and ultimately the subprime mortgage crisis. Another possible explanation is the affordable housing regulations, which made homes more attainable for specific sectors of the population. There were a variety of decisions and factors that helped trigger the recession as well as various delinquencies and foreclosures in the American housing market.

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