Owning your own home is part of the American Dream, but the mortgage crisis in 2007 literally shattered that one hope for many in the country and around the world. Dubbed the Mortgage Mess or Mortgage Meltdown, the 2007 subprime mortgages crisis was heralded as the worst global crisis after the Great Depression of the 1930’s so what happened then and can it happen again?
Reasons For The 2007 Subprime Mortgages Crisis
The mortgage crisis was a result of flawed financial modeling and too much borrowing, mostly due to the assumption that property investments were foolproof. In addition, fraud and greed also played significant roles towards this collapse, largely the private sectors drive for short-term profits.
Owing to the low mortgage rates in the early 2000’s, borrowers were able to service more money with a lower monthly payment. Furthermore, property prices increased dramatically so buying a home was regarded as an unrivalled investment.
With property prices skyrocketing, homeowners gained plenty of equity and most of them leveraged this by taking out second mortgages or refinancing to get cash out of this equity. Some used the equity money to maintain their lifestyles, while others used it wisely; all while their wages remained stagnant. Unfortunately, all good things come to an end and the mortgage crisis began.
Property prices plunged at breakneck speeds, and homeowners who refinanced to buy more homes couldn’t afford to pay their respective mortgages. Owing to this tragedy, homeowners could do one of three things: Simply walk away from their home, wait for the bank to foreclose, or renegotiate their loan.
Banks generally recover their loaned amount from foreclosures, but they were on thin ice during the crisis as property prices had dropped to an extent where they had to take a hit on defaulted loans.
Effects Of The Subprime Mortgage Crisis
There are several other factors that contributed to the gravity of the subprime mortgages crisis such as the US economy meltdown, and rising commodity prices. Although businessmen, lawmakers, bankers and consumers scurried to level out the effects of the 2007 crisis, it unfolded a dramatic string of events, which are still felt to this day.
Can It Happen Again?
Although most financial experts consider the 2007 subprime mortgages crisis to be a unique episode, some claim that a few unresolved fundamental problems may coalesce to form the next big mortgage disaster.
The biggest issue and owing mostly to the 2007 subprime mortgages crisis, people are more hesitant to buy homes! They are much more eager to rent and statistics indicate that only 10% of apartments are unrented, which is comparatively low. This cultural transition away from home ownership could result in a whole new type of housing based economic crisis.
Should You Be Worried?
Not yet! As an example, some mortgage lenders have lowered their criterion for FHA financing from 640 to 600 and conventional financing from 660 to 620. However, to take advantage of a low credit score mortgage, you will need a sizable down payment, rock solid employment history and agree to a higher interest rate. But the fact is that banks will only profit if more homes are sold and they can only create this demand with subprime mortgages.