The sub-prime mortgage crisis Essay Example | Topics and Well Written Essays - 2000 words

The sub-prime owe crisis - Essay ExampleThe US sub-prime crisis is the historic turning point in the US economy and orbicular culture. It is the result of the collapse of the speculative bubble in the housing market that began to burst in 2006 and has had undulate effects across many countries in the form of fiscal failures and global denotation crunch. The current assent crisis which is the wave of the collapse of the US sub-prime mortgage market thunder mug be evaluated by understanding the fib which is associated with it in terms of the effects it has had on the borrower as well as the financial statements of the banks, other financial institutions and the investors in the mortgage backed by securities around the world (Walters, 2008). The mortgage lending market is dissever in two sectors prime and sub-prime. Prime borrowers are marked by high income, strong quotation rating and sound savings. Sub-prime mortgages are loans which are extended to borrowers who have low cr edit score, no savings, impair credit history and weak debt to income ratio. Sub-prime borrowers are considered riskier by the lending institutions and are generally assessed at higher(prenominal) interest rates than the prime borrowers. The sub-prime mortgage market emerged and flourished in the 1990s. The sweet trend of extending loans or credit to borrowers with less than perfect profiles was adopted in 1990s and continued until 2005, resulting in increased homeownership recording 64.1 % in 1993 and 68.9% in 2005(Carpenter,2008). The expansion of sub-prime market improved the access of credit and resulted in the boom in the concrete estate market. This also direct to the expansion of credit to those borrowers whose credit was blemished. This period was also backed by strong overall housing market with increasing value of the home prices. Though this trend did not continue and in 2006 the housing market began to slow down, which resulted in rising late mortgage payments, forec losures and defaults. This resulted in the collapse of the US sub-prime mortgage market. The crisis had widespread impact on the borrowers, investors, financial institutions, securitization, and mortgage broker which led to more than involved government regulation. With the emergence of the sub-prime mortgage on the larger scale, there has evolved a new term in the lending world vulturous lending. It was seen that as sub-prime market increased so did predatory lending in some form or another. The Joint Report offered this definition In a predatory lending situation, the party that initiates the loan often provides misinformation, manipulates the borrower through aggressive sales tactics, and/or takes unfair good of the borrowers lack of information about the loanterms and their consequences. The results are loans with onerous terms and conditions that the borrower often cannot repay, jumper cable to foreclosure or bankruptcy (Carpenter, 2008). This brings in the ethics applied i n the lending industry where sub-prime lending can be encouraged and predatory lending can be controlled using regulatory authorities. Owning a stomach is very noble desire very intrinsic to the happiness of the human beings. When the system goes against this virtue and creates more damage to the parties concerned it becomes a widespread crisis. Sound ethical practice applied to different segments of the mortgage industry will provide a channel which will help solve this ruthless money making machinery from exploiting the situation of nave customers or borrowers. The first time home buyers are elated and confused. It is an intimidating screw for the borrowers especially if they have been declined credit because of their income or credit history. It is a challenging task to negotiate the internal ear of loan processing which are overwhelming in terms of loan terms, fees, and financing documents. Most of the time borrowers place their trust in the broker or the lending authority w hich initiates the