Risk And Return Essay2

Submitted By kbush76
Words: 1034
Pages: 5

Risk and Return Essay: Mortgage Crisis of 2008

The American Dream has been a standard set centuries ago with ideas full of prosperity and success that would drive families upward in the social ladder. The American Dream has become the character by which our country is defined; therefore, it has long been a land that is desired by others living in conditions that aren’t geared toward this ideology. It has changed throughout the years as different historical marks have altered the mindset of the United States. The ability to pursue happiness outright, education, owning a business, and leaving a legacy is the pipeline for this dream that is sought not only by people in the United States, but also by those seeking to establish themselves in this land that is overflowing with honey. One of the major factors in the American Dream which hasn’t changed much over the course of time is homeownership.
Homeownership is becoming an exclusive members’ club (Jones, 2014). The increase in homeownership after 2001 provided a big boom for our economy; temporarily. In 1999, Congress passed the Gramm-Leach-Bliley Act, which was also known as the Financial Services Modernization Act of 1999. This law repealed some of the Glass-Steagall Act of 1933, allowing banks, securities companies, and insurance companies to act as a combination of an investment back, commercial bank, and an insurance company which created financial supermarkets (Jenkins, 2012). The United States economy was in the middle of a recession in 2001 when the attack on the World Trade Center’s took place. “The stock market was closed for four days following the attacks which happened for the first time since the Great Depression” (Armadeo, 2014). The day the stock market reopened the Dow and fallen 7.13%, a 617.78 point loss.
This circumstance and the high costing War on Terror further hindered an already declining economy. Laws such as the Gramm-Leach-Bliley were seen as jump starters for the fallen economy. A drive towards part of the American Dream was becoming a reality for many families; homeownership. Through changes in laws such as the Community Reinvestment Act of 1977 and programs such as Neighbor Works America, increasing homeownership for minorities and low income families were becoming a reality. In 2011, Michael Bloomberg, Mayor of New York, stated, “It was not the banks that created the mortgage crisis. It was plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp” (Denning, 2011). Although Congress did pass and amend the laws which caused the lending practices to be altered, many believe that they are not the blame for the crisis of 2008. Those skeptics have blamed the banks for approving loans to people who were ultimately unable to pay back the debt but then pooling the loans together and securitized to have them approved. The lenders were allowing the borrowers to defer payment on principle and sometimes part of the interest, but would eventually face a payment increase large enough to cause payment “shock” (Jenkins, 2012). I was offered a loan of this type as a young man about 10 years ago but declined the offer after doing my own research.
It has been widely accepted that buying a house is an investment with a more than likely large return. However, in 2008, home prices declined drastically at rates bigger than those of The Great Depression (Perry, 2014). Many Americans during this period of the booming housing market purchased their home using subprime mortgages which are issued to people who are considered risky borrowers. When the housing market fell between 2006 and 2008, many borrowers saw no need in continuing to make the mortgage on their home due to the loss they had inquired from upside down mortgages, loss in value, and loss in equity. Many were lured into bad loans with low payments initially, only to be hit with increasing payments later during the loan period.