The Sub-Prime Crisis

This paper’s intention is to explain two issues: (1) causes of the sub-prime crisis and (2) the major parties responsible. Through a detailed analysis, excessive deregulation of the financial system, bad lending, excessively accommodative monetary policy, lax regulation and housing bubble are the factors leading to the sub-prime crisis which in turn led into an economy crisis and global financial meltdown. This is due to over-confidence in the financial market and irrational behavior by the borrowers, lenders and the investors driven by monetary greed which aggravated the sub-prime crisis.

2. Introduction

In US, owning a home is part of “American Dream”. It allows people to take pride in a property and have a sense of belonging in their

In the early 2000’s, mortgage interest were low. This allowed people to borrow more money with a lower monthly payment. Furthermore, prices of housing were increasing at such a rapid rate which allowed lenders to think that putting the borrower’s homes up would make good collateral.

Eventually, this loaning method which turned into a snowball effect triggered the mortgage crisis. In Section 1, it explains the growth of the housing bubble. Section 2 explains how the high –risk lending in banks was done during the sub-prime crisis. Section 3 explains how the housing price crash and downturn contributes to the sub-prime crisis. Section 4, 5, 6 and 7 explain the major parties that are responsible for the sub-prime crisis. Section 8 explains how hedge funds fueled to the sub-prime

Due to the community reinvestment act designed by U.S. federal law, commercial banks and saving associations were encouraged to help meet the needs of borrowers in their state community, including the low and middle income citizens. Therefore, not only loans were issued at a rapid rate, it forced banks to lend to disadvantage borrowers with bad credit scores which included the illegal immigrants to help get the mortgages for their homes. But because these were financially disadvantaged potential borrower, they posed as a bigger credit risk. Loans would not be sold off easily due to the high-risk borrowing. Fannie Mae and Freddie Mac, who were government-sponsored enterprise (GSE) and acted as a secondary market for mortgages, were mandated to insure these high risk loans with the government so that the mortgages could be repackaged and sold. The financial products, also known as derivatives were manufactured in large quantities. Major rating agencies were paid with a handsome sum of money for rating their financial products, which in turn became easier sales and greater profits for the