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							                                                                        Econ 311 Term Paper PT 1




                           How the Crises Unfolded
       In 2000 to 2005 the housing marketing was booming. The market grew rapidly in some

states like California, Nevada, Arizona, and New York. Many of the loans that were being

approved for borrowers were subprime loans. Many of the lenders knew that these borrowers

would not qualify for the loan under regular circumstances. However, they made it possible for

people who did not have the proper income, FICO, loan to value ratio, and other qualification to

qualify for a mortgage that would so be too much for the borrower to handle.


       It’s everyone’s dream to own a home and have that “American Dream”. Since lenders

know that a borrower will jump at a change if presented with the right numbers, they preyed on

these people. There were loans that were interest only payments that made a borrower believe

that their payments could be so low. However, many of them did not understand, or they were

not explained to correctly, that those payments never covered the money they borrowed. It only

cover the interest on the loan, hence the low payments.


       While all the mortgages were being attained by regular people and investors (who made a

lot of money from buying low and selling high), the government entities Freddie Mac and Fannie

Mae were buying these mortgages. They believed that the banks had their rules and standards

and had to follow this to sell their loans to them. The banks did make sure their loans qualified to

be re-sold. However, they were not making sure they qualified financially.
       Eventually after all the crazy price of houses being raised so high, it all came crashing

down. In 2005 the Federal Reserve started to raise the interest rate, which was at its all time low

of 1 %. The banks now had to pay more to borrow money, so they in return raised their interest

rate. The borrowers who had adjustable rates started to default on their mortgages. The payments

went from low thousands to very high thousands, and of course if you could barely afford and

$2000 mortgages you won’t be able to afford a six or seven thousand dollar mortgage.


       Therefore, the next step is obviously is to default on your loans. Many of the subprime

loans were given to minorities who wanted to be homeowners. However, these were the same

people lost their homes first. All the creative financing had come to an end and no one could help

these people safe their home. The investors who had used the house boom for profit also got

slammed with properties that they could not flip. The banks started foreclosures on their entire

default loans, and because so many properties were being foreclosed and not many were being

re-sold, the banks lost a lot of money, about $40,000 per house. The prices of houses started to

drop drastically. Other loans started to go into defaults because of the unemployment. Many

borrowers started to lose their jobs and could no longer afford their mortgages, fixed or

adjustable.




                            The Cause of the Crises
       In 2001 and the spring 2003 the Federal Reserve decided that they would drop their

interest rates from 6.5 percent to 1 percent. This was a record low for them, and this ultimately

set the stage for the housing boom. Once the banks realized what the FEDS did they lowered

their rates, which included mortgage rates. Suddenly people could afford a mortgage, but not just
for any house, they were more expensive than they could afford. The banks were lending

borrowers who could not qualify for a conventional loan. They created sub-prime lending. This

allowed people who didn’t have a FICO score higher than 640 the ability to afford a mortgage.


       The economy was doing great, people were finding jobs because everyone was hiring.

Therefore, this allowed borrowers to make their payment. Especially since the banks had created

“creative” lending for their mortgages. Some borrowers who could not afford a conventional 30

year fixed loans, the banks created other alternatives like: interest only payments, adjustable-rate

mortgages or ARMs. These mortgages allowed the borrowers to pay only the interest of the loan

which made their monthly payments significantly low.


       In 2006, the housing market started to fall drastically. The matter became worst because

the economy that was thriving off this market, became stagnant. People started to lose their jobs

and they could not afford their mortgage payments. The adjustable rate that they had went up and

they could not afford their mortgages. The unemployment rate was so high and the foreclosures

were even higher. Many people lost their “American Dream” home.


       The crisis happened because we had greedy lenders and too many disparate borrowers.

Every person dreams of one day being able to buy their first home and if given the opportunity

they would take it. The crisis happen because no one looked to see how this would affect the

country in the future. If they did look they did not care and were only concern with the now. This

country was built on capitalism and nothing gets in the way of it, not even religion.
                            Who Should We Blame?


       This is the question that everyone wants answered. Who should we blame? Should we

blame the Federal Reserve for dropping the rates so low, which cause the banks to follow, which

had regular people taking out mortgages that would be for upper middle class income and higher.

Should we blame the banks for creating these loans that allowed low income people to get higher

income loans, loans that they would not qualify for otherwise. Should we blame HUD, Fannie

Mae, or Freddie Mac for not protecting the borrowers enough and buying the loans on the second

market and selling them again and spreading the soon to come virus. Should we blame ourselves

for not being diligent enough that we trust our finances with strangers? It’s a hard question to

answer, but I think everyone should be blame. No one took the initiative and said this can’t be

right. Everyone was out for themselves. The sad part of it is only the people who couldn’t afford

their loans in the first place lost. They lost everything, their homes, their saving, some their jobs

and who knows what else.


       The fact that we are the most powerful country and can’t protect our own citizens from

financial harm like this speaks volume. It says only the strong, or in this case the wealthy will

survive. We cannot allow our country to be this way. I think that we are blinded by this

“American Dream” so bad that we can’t see when we’re making big mistakes. We allow

ourselves to walk into debts that we know that we can’t afford, but believe somehow that could

change. We are constantly over indulging ourselves in things we don’t need. We have to start

with ourselves if we want change in this country. The politicians that we elect are a reflection of

us. Although we know they serve themselves once they are elected we still re-elect them.
       As mention in The Housing Boom and Bust by Jeffrey Friedman, “Clearly this was a

crisis of regulated capitalism, but the pressing question is whether it was the capitalism or the

regulations that were primarily responsible.” I believe it was our greed for “success”. The money

you have the more successful you will be. Those are our principles in this country. Of course, if

the banks are going to make a lot of profit from these subprime loans they will make it happen.


       Once all of this is behind us, I hope that the next generation of borrowers empower

themselves to not get taken advantage of and use all their resources to make sure this doesn’t

happen again. Because if there are no one who will borrow just anything then the lenders will be

force to create a better program. The government needs to serve the people who elected them and

stop serving themselves. We also need to stop looking to the government to solve our problems

because they are not error proof.