Mortgage Market Crisis

THE MORTGAGE CRISIS IN THE U .S

Metrics defined and used

Foreclosure , Sub-prime lending , Mortgage rates , House sales , House prices , Housing starts

Recent trends have shown unprecedented levels of foreclosure rates of the U .S . homes which have been linked to an unprecedented mortgage crisis which could lead to a recession of the U .S . economy . This essay looks at several parameters for defining this mortgage crisis , and their overall effect on the U .S . economy

I Foreclosure

Foreclosures are defined as processes of legal action usually started when

borrowers fall 90 days behind on their mortgage repayments , of which nearly 40 of mortgages end up in liquidation . As shown in Figure 1 , foreclosures have been steadily going up since 2006 with American families losing their homes . A nearly 0 .58 0f American homes were foreclosed in 2006 , and the number shot up in 2007 to 405 ,000 , which crossed the 1 mark nationwide Christie , 2008 . As Figure 1 shows , the rate seems to be accelerating and many economists believe could last well into 2009 , and even longer The most significant aspect of this phenomenon is that most forclosures have affected the sub-prime mortgage market . The sub-prime mortgage and lending are terms which are discussed below

II Sub-prime mortgage and lending

The mortgage crisis in the U .S . is largely due to sub-prime lending (Figure 1 , which means that huge amounts of loans had been given out in previous years to people with poor credit scores without any proper assessments of their ability to repay . In many instances it is suspected that , people obtained mortgages through fraudulent means with lenders and borrowers breaking rules (CNN Money , 2008 . Most of this lending started on a large scale in 2003 when mortgage rates (discussed below ) fell to their historic low . Banks could borrow additional money easily from private lenders through the mortgage bond market , apart from the Freddie Mac . The housing market bubble seen in the U .S . in recent years followed the explosive growth in 2004 and 2005 of sub-prime mortgages , which were lent to numerous 'sub-prime ' buyers who otherwise would not have qualified for mortgage lending . By comparison , the traditional 'prime ' mortgage holders (with proper credit history and ability to repay ) have not shown a worsening trend

Figure 1 . Foreclosure start rates in the prime vs sub-prime sectors (Source : U .S . Government Accountability Office , HYPERLINK "http /www .gao .gov " www .gao .gov

III Mortgage Rates

Mortgage rates refer to the rates of interest that mortgage holders pay every year upon their remaining mortgage . There are three mortgage rates of interest to us to explain the current crisis , fixed rate , short-term rates and introductory rates (explained below . Fixed rates refer to an agreed rate which would remain fixed for a specified period of time . All mortgage rates fell to a historic low in 2003 , prompting many buyers who previously could not afford mortgages to buy houses for the first time However it must be remembered that although fixed rate mortgage rates...