Finance - Admission/Application Essay Example

They were definitely in a big mess even as defaulters and foreclosures demanded their dues. I chose this topic for my proposal because it is a classic example of how unjustified borrowing can cause tear down financial markets. This paper will explain the reason behind the subprime mortgage crisis and the consequences that followed. At the end, many people not only Americans, but also from the entire world learnt a lesson (Muolo and Padilla 3-7). Subprime Mortgage Crisis Many financial analysts have come out to explain the reason behind the collapse of the U.S. housing market.

In fact, many of them agree that the reason behind the subprime mortgage crisis in United States was how people watched the quality of loans deteriorate for six years prior to the crisis. The reason behind this bad scheme is that bankers resorted to securitization portfolios completely ignorant of the disaster awaiting. Additionally, the ever-rising number of subprime mortgages sealed the crisis and sent in into the collapse zone. Other macroeconomic factors also contributed to the subprime mortgage crisis.

For example, there was significant price appreciation of houses such that not many people could afford. The demand for homes eventually went down and even as the value of houses declined. It is also imperative to note that the high number of available subprime loans attracted novel borrowers into the market leading to price appreciation, but on the contrary, there was a tremendous rise of risk on the part of the borrowers. Eventually, it became evident that default rates had gone up, which became the biggest problem in the housing market, as the borrowers selling their houses at cheap prices could not afford to refinance the mortgages.

In fact, the depreciation of the value of houses coupled with adjusted mortgage rates led to the upsurge of the possibility of delinquency without actually revealing the quality of the loan. It therefore means the homeowners had to refinance the appreciated mortgages even if it means it was so much expensive. It also came out that although the subprime make-up went up, the riskiness did not do that as well hence, and there was a huge decline of the value of houses (Simkovic 253). Monetary policy is also another factor that contributed to the crisis.

People investing in the housing sector would love the government to enact policies that will streamline the risk-taking behavior from financial institutions. Before the crisis started, the lenders charged low interest rates. However, the decrease in the US federal rates preceding the original loan automatically led to the augmentation of rates on existing loans, and many borrowers could not afford to pay. In fact, in an event of change of monetary policy and an increase in the base lending rate, the riskiness increases and the market is eventually at stake.

In addition, another contribution emanated from the U.S. government circles. The government believed that every American should own a house, and in order to achieve this, it subsidized homeownership by reducing the interest rates charged on mortgage and introduced subsidiary programs that would lend money to people who will then buy houses and repay later. On the contrary, these led to serious consequences such as fragility risks especially in the housing market. Moreover, due to these subsidiaries and programs, the securitization portfolios affected the