The subprime mortgage crisis is an ongoing event likely to affect buyers who purchased homes in the early 2000s for a long time. These effects will translate to changes in the housing market, consumer spending, changes in lending practices, and perhaps, revamping of the home loan system. What is meant by the subprime mortgage crisis is that many home loans taken out during a housing bubble occurring on the two US Coasts, from 2000-2005, were given at a subprime rate, and have now led to extensive foreclosures on home loans, and people having to leave their homes because they can’t afford the payments.
The housing bubble, meant that for a time, houses sharply increased in value and consumers often borrowed at a subprime (less than the lowest) rate believing that the price of their homes would rise and they could thus refinance for lower payments. Many people didn’t just refinance for lower payments but also for consumer spending. Inflation of house prices meant people in possession of a home suddenly had more equity in their home. They could access some of that equity by refinancing, and spend the money as they chose.
Unfortunately, the bubble began to burst in late 2005 and houses began to decline in price. People who refinanced, especially those who did so with variable interest rates, suddenly had homes valued at much less. Many with variable rates and interest only loans ended up unable to continue making payments on their home, flooding the market with more homes for sale than usual and further lowering home values.
Another issue at hand was that a variety of mortgage companies that had issued subprime loans, invested their money in hedge funds that became worthless. This meant that several of the largest lenders of subprime loans contributed to the subprime mortgage crisis by having to claim bankruptcy and foreclose on loans. People who now had homes at lower values, had loans larger than the value of their homes, and were frequently unable to refinance with other lenders. Stricter lending practices by remaining mortgage companies has also been a factor in the subprime mortgage crisis, since some of the homeowners were ineligible for any type of loans based on new criteria.
A country’s economy is usually affected by a wide variety of factors. Reductions in spending, losses in the stock market, bad investments, and many other things can affect home price. The instability of the stock market, hedge funds that failed, and reduced consumer spending have all caused an increasing devaluation of homes and been partly to blame for the subprime mortgage crisis. It is unclear exactly when this issue will be resolved since so many factors have contributed. For now, it is clear that many have lost their homes and their ability to purchase new homes, and this has affected the rental market. Rental prices have gone up because demand for rental residences has increased in this crisis’ wake.
