The of mortgages. Refinancing became a daunting task

The US subprime mortgage
crisis was occasioned by a rise in home foreclosures back in 2006, a phenomenon
that spiraled and ran out of control in 2007. As a result, this ended up
triggering a massive national financial crisis globally. Activities such as the plummeting housing market,
declining consumer spending, unstable stock markets and an increase in the
number of foreclosures marked the
subprime mortgage crisis. Based on the
available empirical evidence, the subprime mortgage crisis caused pronounced
dissension among lenders, legislators and consumers to the extent of eliciting furious debates regarding its likely causes
and the possible measures for addressing it (Kamiya, 2016).
Therefore, it is clear that the U.S subprime mortgage crisis mushroomed due to the conditions and events
that occasioned widespread financial turmoil
that was earmarked by a rise in mortgage foreclosures, delinquencies, as
well as a decline in mortgage-backed securities.

During the U.S subprime
mortgage crisis, the proportion of low-quality subprime mortgages rose to about
20 percent between 2004 and 2006. Unlike in other nations, the U.S experienced higher
ratios that even increased to over 90 percent in
late 2006. Analytically, such spontaneous changes resulted from higher-risk mortgage products and
the lowered lending standards. Besides this, it is vital to note that during
the subprime mortgage crisis, the majority
of the households in the United States had increasingly been indebted. This phenomenon was apparent due to the rise in
debt to disposable personal income ratio from 77 percent back in 1990 to a
whopping 127 percent towards the end of 2007. Such huge increments were related to the proliferation
of mortgages. Refinancing became a
daunting task after the peaking of house sales prices in mid-2006. The period
after the mid-2006 was characterized by a steep
decline in house sales prices, prompting adjustable mortgages rate to reset at
the prevailing high interest rates. This
phenomenon resulted in the soaring of
respective monthly payments, thus at the end triggering mortgage delinquencies.
For this reason, most of the securities that were
backed by mortgages as well as the subprime mortgages that were expansively helped by major financial
firms ended up depreciating. Following the unprecedented decline in value of
subprime mortgages, there was a drastic reduction in the purchase of
mortgage-backed securities and debt by most investors globally (Reid, Bocian, Li & Quercia, 2017). Furthermore, concerns regarding the soundness of
United States financial and credit market were elicited, thus prompting the
formulation of measures to tighten credit globally.  However, this ended up slowing economic
growth in Europe and the United States of America.

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According to the
International Monetary Fund (IMF), “the subprime mortgage crisis was caused by the bursting of the housing
bubble in the United States,” a phenomenon that peaked in 2005-2006 (Gartenberg & Pierce, 2017). As a result, there were
high rates of default on subprime as well as other adjustable rate mortgages. The effect was later preceded by an increase in
foreclosure activity and defaults. Unlike what had been anticipated earlier, the home prices failed to increase as per
the initially conducted market projections, implying that most U.S homes would
be worth less than the respective
mortgage loans (Gartenberg
& Pierce, 2017). As a result,
borrowers were forced by the prevailing market conditions to enter foreclosure,
thus contributing in draining wealth from households and the subsequent erosion
of core financial strength bestowed to the banking institutions.

The U.S subprime mortgage
crisis can be attributed to various factors
in credit and housing market. Primarily, it is
outlined that the crisis was catalyzed by the inability of most
homeowners in the United States of America to repay their mortgages. Besides
this, overbuilding of homes during the boom period is also outlined to be a
primary cause of the subprime mortgage crisis in the United States. Despite
this, it has been pointed out that the
influx of money from “banks to the mortgage bond market, private sector and
predatory lending of mortgage lenders were the primary
catalysts of the witnessed subprime crisis” (Kim & Ryu, 2015).
Besides this, the U.S established
Financial Crisis Inquiry Commission as a result of the failure of the Federal
Reserve to present toxic mortgages through the inability
to requisite financial regulation.
Failure to requisite was a significant cause of the U.S subprime mortgage
crisis (Kim & Ryu, 2015).
As a result the subprime borrowers
reduced repayment capacity and the hampered
credit histories.

Alternatively, subprime
loans faced high default risk compared to
the loans advanced to prime borrowers. “By March 2007, the total value of the
American subprime mortgages was approximately $1.3 trillion with an outstanding
$7.5 million first-lien subprime mortgages” (Ali, Islam, Nguyen & Smith, 2015). It is clear that there was a boom in subprime
lending, a result from the expansion of
non-banking independent mortgage originators. It
is because, in 2001-2003, the
share of subprime mortgages was less than 10 percent whereas, in 2004-2006, the proportion of subprime
mortgages share relative to the total originations increased to 18%-21% (Ali, Islam, Nguyen & Smith,
2015). However, this later declined to
6.8% in the third quarter of 2007 following the U.S subprime mortgage crisis. In
the comparable quarter, the foreclosures
accounted for 43% of the advanced subprime mortgages, thus clearly indicating
the severity of the crisis.

Based on
the aftermaths of the U.S subprime mortgage crisis, it is apparent if a given
borrower ends up being delinquent regarding making timely payment of a given
mortgage to a load servicer such as a back. Then the lender of the respective
mortgage under consideration may be forced to repossess a given property
through foreclosing. It shows that a bank or in some instances other financial firms will be the winner
whenever borrowers become delinquent in making timely
mortgage payment. On the contrary, the borrower will be the loser since the
property that might have been financed by a respective subprime mortgage will be repossessed through foreclosure. 


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