Subprime Mortage Essay

1444 words - 6 pages

In over half a century since the World War II ended ten recessions succeeded it. However, The Great recession of 2007 was the longest, deepest, widest and most severe of them all, as it lasted from December 2007 through June 2009. The collapse of the housing market in America, which is known as the Sub-prime mortgage crisis was determined to be the main cause of the great recession of 2007. This sub-prime mortgage crisis drastically affected millions of Americans as it increased unemployment, which led to an increase in poverty, thus prompting the government to respond.

Mr. Claude Gerald, Retired Economics Lecturer at the Montserrat Community College, stated “The Financial Crisis of 2007 ...view middle of the document...

” Mr Barker noted that this plummeting value of the houses resulting in borrowers having negative equity because the houses were worth less than the outstanding balance that they had on their loans. Every house owner expects to have sufficient equity after selling their home, paying any associated costs and the outstanding balance of the mortgage, however, due to the plummeting value of house prices they were unable to do such, neither would they be able to make down payments on their future thus stagnating the real estate market (Barker). Justine Davis, Financial Editor and Commentator at Canstar explained “With a large number of borrowers defaulting on loans, banks were faced with a situation where they repossessed houses and land that was worth less on today’s market than the bank had loaned out originally”. Miss Davis explained that Banks were faced with liquidity problems, as the amount that they should have received which were the interest and mortgage repayments, did not match the amount that they lent as they were expecting to make a profit along with obtaining the principle but unfortunately a substantial loss was made instead. Subsequently lending overall became difficult and also so did the lenders ability to finance their operations (Davis).

The sub-prime mortgage crises lead to an increase in unemployment. This increase in unemployment was due to the fact that lenders of these mortgages were suffering from liquidity issues. Many filed for bankruptcy, which resulted in millions of Americans losing their jobs in the financial market (Davis). New Century Financial was one of America’s largest sub-prime mortgage lenders that faced liquidity problems due to a large number of early payment defaults. As these defaults started to pile up, the company's available capital dried up. Subsequently, New Century Financial became bankrupt as the defaults continued to increase to the point that New Century simply ran out of money and no one was willing to lend it more (Investopedia). The company filed for bankruptcy court protections, cutting 3,200 jobs, or 54% of its remaining work force that had already been scaled back in previous weeks as it stopped accepting new loans (CNN Money). Additionally, The Lehman Brothers, who was the largest victim of the subprime mortgage crisis, went bankrupt, as they were six hundred and nineteen billion dollars in debt (Investopedia). This bankruptcy resulted in More than 20,000 Lehman Brothers employees in America to lose their jobs when that venerable investment bank went under (Fox Business).

The sub-prime mortgage crisis not only caused an increase in unemployment in the financial market but also the labour market on a whole. In 2008 and 2009, the U.S. labor market lost 8.4 million jobs, or 6.1% of all payroll employment (The State of Working America).
Moreover According to Douglas A. McIntyre CEO of 24/7 Wall Street Financial News and Opinion Company, “Of those job losses, 700,000 stem from layoffs...

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