Mortgage Crisis in USA

Introduction

In the year 2007, the economy of United States of America has entered a mortgage crisis that has caused economic turmoil and panic all around the world. These crises were occurred because of borrowing and flawed financial modeling. These were mainly based on the assumption that the prices of the homes will go up. There was a significant role played by fraud and greed (Reinhart, 2008).

The Dream of American

Owing a dream is a dream of every American. The homes are expensive and to buy one people have to borrow money in order to get one. During that, the conditions were right for the people for achieving their dream. During early 2000's people were permitted for borrowing money along with paying lower monthly payment. Moreover, there was a significant increase in the prices of home, thus buying a home seems like a sure bet. Lenders were encouraged to participate because they understood that the homes make good collateral. The mortgage crisis was activated as the situation built momentum.

Cash Out

There was the enormous wealth found in their homes because of having plenty of equity thus the homeowners refinanced and also took second mortgages for getting cash from their home equity. The expenditure of money spent widely and the some maintained only the living standards while the wages stayed stagnant.

Easy Money before the Mortgage Crisis

Before the emergence of the mortgage crisis, banks had offered east access to money. People who having bad debt could qualify as the subprime borrowers. There was no requirement for the documentation which had lead to the high risk of mortgages. The application of Mortgage was checked for the purpose of accuracy and also the fraud, and brokers of the mortgage have lead to the severe mortgage crisis.

Sloshing Liquidity

As the interest in the risk free asset was so low, people have chosen in an alternative approach to invest in other securities rather than investing in government securities. The people were invested in mortgages because the prices were too high and therefore, they started taking loans from banks for investments in mortgages. After the people began defaulting on the loans that have been taken by banks, it has given rise to the mortgage crisis. Investors and the banks started losing their money, on the other hand the financial institutions decided to reduce the risk related to exposure quickly. The economy of United States of America has softened and also the higher prices commodity hurt businesses and consumers. Other multifaceted financial products began to loosen (Mian & Sufi, 2009, pp-1449-1496).

This crisis could easily be controlled by government and regulatory authorities if the government has provided high interest rate for attracting people towards government securities. Banks have lost money because of providing loans without any documentation, due to which people began to default, and this had lead to the economic crisis in United States of America. Banks had to emphasis on recovery of its loans then it would be the easy solution to recover the economic crisis of ...