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The Big Short Essay

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The 2007-2008 financial crisis was the culmination of events that lead to the demise of the US economy. In the film The Big Short, Michael Burry an investor from Scion Capital, notices that the housing market is very unstable and could crash atany time. He plans to short the housing market by purchasing credit default swaps. Credit default swaps were designed as safety net for banks, because of the mortgages they sold. When a homeowner gets a mortgage, the bank posses some risk that the homeowner might not pay their mortgage, so the banks looks to an insurance company to sell them a credit default swap. That way bank will get their money even if the homeowner defaults on their payments, inreturn the insurance company only take a little bit …show more content…

The average price of a house skyrocketed 124% between 1996 and 2006 (CSI). This lead homeowners to believe that if they bought a house it’s value would only go up, therefore making them money. This unfortunately didn’t happen because to many people defaulted on their mortgage. In 2001, the national median home price ranged from 2.9 to 3.1 times median household income. This ratio rose to 4.0 in 2004, and 4.6 in 2006 (CSI). This upward trend shows the trust being gained from the american people in the housing\ market. People felt confident that they could afford an expensive house because they were lured in with low adjustable interest rates, that then increased to an outrages rate in a few years. As more and more subprime mortgage owners defaulted on the payments it trapped those in adjustable mortgage rates. With interest rates rising it caused many to default on their payments or take out a second mortgage with they couldn’t afford. By August 2008, 9.2% of all US mortgages outstanding were either delinquent or in foreclosure, by September 2009, this had risen to 14.4% (CSI). This lead to a huge number of house for sale and nobody able to buy them. As a result prices fell leaving people paying more than what there house was worth. This caused even more people to walk away from their mortgage because it was a waste of their

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