week 8

In 2008, many factors cased the financial crisis. Also competing political, economic and organizational interests have resulted in a variety of narratives describing the crisis.

Mortgage underwriting, In addition to considering higher-risk borrowers, lenders offered increasingly risky loan options and borrowing incentives. Mortgage underwriting standards declined gradually during the boom period.

A down payment refers to the cash paid to the lender for the home and represents the initial homeowners’ equity or financial interest in the home. A low down payment means that a home represents a highly leveraged investment for the homeowner, with little equity relative to debt. In such circumstances, only small declines in the value of the home result in negative equity, a situation in which the value of the home is less than the mortgage amount owed. In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever.

Consumer and household borrowing U.S. Households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis. This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn.

On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns.

The subprime crisis came about in large part because of financial instruments such as securitization where banks would pool their various loans into sellable assets, thus off-loading risky loans onto others. (For banks, millions can be made in money-earning loans, but they are tied up for decades. So they were turned into securities. The security buyer gets regular payments from all those mortgages; the banker off loads the risk.