Subprime loan crisis, the subprime mortgage business and markets, government intervention, mortgage lending, housing market
There is always debate during an election year whether there is too much or too little government intervention in the social or economic realm, but whatever a person's personal beliefs are, the truth is that government regulation is a fact of life. The topic of this paper is the role that the government should play in regulating the overall market and economy with the primary example being the subprime mortgage business and markets.
[...] One of the basic premises of the loans is that whenever there are people with limited borrowing and financing capacity, people must resort to alternative sources of funding for credit, this being the case in pawn-shops and check cashing outlets; the same concept is carried over onto the mortgage market where subprime loans were developed to target lower income-higher risk individuals who would normally not qualify for a typical loan. In contrast, prime loans were made for those with higher credit score rating, increased job stability and with generally higher earned income. The way these subprime loans are structured, they allow borrowers to take out a mortgage that they would otherwise not be able to receive at a cost greater than prime loans, numerous conditions being included of course: such as higher interest rates and adjustable rates (ARMS) that would reset in 2-3 years after the initial loan was originated. These measures were first put in place to offset the increased risk of delinquency and default. [...]
[...] "Securitisation and the Bank Lending Channel." No 653. November 2007. Havard, Cassandra Jones. "To Lend or Not to Lend: What the CRA Ought to Say About Subprime and Predatory Lending." Florida Coastal Law Review (Summer 2005). Mian, Atif R. and Amir Sufi. [...]
[...] The change in the markets which aggravated the risk problem was the vast securitization, or developing them into tradable securities of mortgage loans. It is by far this process which would create the cataclysmic chain of events that would bring about the weakening of the whole domestic economy and cause financial turmoil in the months to come. At the sake of making huge profits, a business of securitizing the loans and selling them off to investors was developed that transferred the risk away from the loan originating companies and would create perverse incentives for them to push more and more loans. [...]
[...] There has been debate over the past few months of increasing governmental restrictions and passing stricter real estate laws with most people calling for more government supervision and regulation over the loan and securitization process that has become so problematic when there was little downside risk to direct parties. The moral hazard that was created when there was an unlimited market of profit with no risk until it was too late saw the widespread emergence of so called predatory home mortgage loans and lack of enforcement of credit risk evaluation. While the purpose of originating loans strictly to securitize them has involved a degree of impersonality and would make some feel uncomfortable, some practices were ethically questionable while others were outright criminal. [...]
[...] Before they can do that, many borrowers who fall under the subprime category do not have the proper education to fully comprehend the way the deals are structured which automatically puts them at a disadvantage and making it easier for unscrupulous lenders to take them for a ride. Educational classes or written resources would be a great help to those who are prepared to buy their own home. Even a mortgage counselor would be of tremendous help if they would be able to talk them through the process to make sure they find the best deal that they can. [...]
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