The interest in safe, Mortgage backed securities is among the factors that resulted in the subprime crisis that caused such upheaval in the global financial world. To make more and more residential loans, lenders created many new loan programs, often with relaxed qualifying standards, for instance:
1) Requiring minimum income or asset documentation 2) Not considering a borrower's impaired credit or capacity to repay the loan 3) Waiving the requirement for an appraisal to ensure property's value being financed 4) Requiring minimum or no deposit 5) Allowing borrowers in order to avoid Mortgage Insurance having a second and third Mortgage combined for up to 100% of the value of the property.
Many, if not all, of the home loan programs that used these tactics aren't offered today. Additionally, lenders offered arms (ARMs) that have negative amortization, rate adjustments occurring as frequently as every half a year, and exorbitant monthly interest caps. These risky Mortgage programs were often provided to "subprime" borrowers, those that could have low credit score history, higher debt, lower income, previous bankruptcy, short history of employment, and other lower than ideal characteristics.
These subprime loans frequently triggered maximum delinquency and foreclosure. When Mortgage backed securities declined in value due to the bursting of the real estate property bubble, Wall Street investors quit purchasing them which tightened the complete credit market around the globe. The impact of these a recession around the economy is significant:
1) Available financing for jumbo loans is fixed 2) Most high risk loan programs are no longer available 3) Conventional Mortgages have risk-based pricing 4) Underwriting guidelines are tightened up 5) Mortgage Insurance availability might be restricted
As a result of these restrictions, many borrowers think it is tough to obtain Mortgage loans. Moreover, new federal and state laws passed to prohibit predatory lending, regulate high cost loans, amend foreclosure procedures, set national standards for Mortgage professionals, and define suitability requirements for borrowers.
Who's critical to the subprime Mortgage crisis? Simply speaking, everyone. First, you'll find government regulators and lawmakers who, for many years, presided over policies that encouraged and allowed borrowers to be eligible for loans that they can couldn't afford. Regulators were also can not understand that the finance ratings provided to Mortgage backed securities ought not happen to be as high as we were holding. Next in line for your blame are extremely lenders and loan originators (including brokers) who sold loans to borrowers regardless of whether they knew that the borrower was vulnerable to default. This didn't matter for them ever since they were planning to sell the credit and if it did default the main lender or broker wasn't likely to be around the hook.
Wall Street investors may also be to blame for foolishly committing to items that were not stable. Fund managers were not really capable to look beyond short-term profit and gain to appreciate the true long term risk that was happening. Finally, and arguably most significantly, the consumer is usually to blame for demanding these products. Because, if you find no demand for subprime Mortgages, then lenders and Wall Street investors may not have to supply them. A culture of high leverage along with a "keep up with the Joneses" mentality would be a recipe for disaster.
