The most depressing recession in recent years began in 2007 when the number of high-risk mortgages spiked up drastically. A housing bubble quickly inflated. And when it burst its devastating effects rippled throughout the US and even to the rest of the world.
In the mid-2000s the country was in a housing boom. This was fueled by the increase in demand. Speculators entered the market, driving the demand further up. Combined with the very low rates during that period, lenders offered mortgage loans to borrowers with poor credit. These loans were called subprime loans.
During that time, subprime mortgages carried adjustable-rate loans with cheap initial interest. Once this initial period is over, the interest rate increased dramatically. The need to make higher payments became one of the major reasons why many borrowers defaulted on their loans. The numbers peaked in 2009, leaving many banks bankrupt, with monstrous losses sustained by Wall Street firms. Not long enough, the whole world entered a global recession.
The Strive to Take Control
Much of the blame was attributed to lenders. They originated loans which allowed high-risk borrowers get home financing. However, it should be noted that the home demand was high during that time, housing prices were increasing and rates are at their lows. Earlier on, these things were seen as signs that the economy was healthy. Subprime lenders may not have seen it as a great risk initially.
To control the damage the crisis was causing, the US Government, Federal Reserve, and many financial institutions took several actions. This brought about the finalization and implementation of new laws governing mortgage application. It worked to create a definition of what a mortgage loan should be.
Loans that fit this definition are considered conforming loans. This prohibited lenders from making higher-priced loans without making sure that a borrower has the ability to repay the loan. It required lenders to do a standard employment, income and asset verification, a well as a credit check. Because of this, a borrower may not be able to sue the lender in the event that a default occurs, with a claim that the borrower was given a loan which he/she may not be able to afford in the first place.
The Tentacles of the Past
Today, subprime loans are still available. They are not wiped out completely. The difference from a decade ago is that subprime lenders have become more cautious about whom they approve for a loan. While others see this as a downside, it lessens the risk of having more loans in default.
Although looking back we see a grim picture, better days have come by since that point in time. Now, we still enjoy historically low rates. The presence of subprime lenders and their loan offers allowed those who cannot qualify for a conventional loan to take mortgage loans. The crisis taught many Americans a lesson about debts and how it can cripple the nation if remained unpaid. Home loan defaults and delinquencies continue to drop year after year. More people are more concerned with managing their debts and finances.
The opportunities presented by subprime loans are not for everyone. But for the select few, it gives them an option to take on a mortgage loan that can put them in a decent dwelling.