What Led to the Economy Crash?
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RYAN D. FERRELLI’s Blog
What Led to the Economy Crash?
The increased demand caused by subprime mortgages was simply unsustainable, ultimately causing the real estate market to crash. People simply were purchasing homes for higher prices that what they were intrinsically worth because of the lenient credit practices. Another problem plaguing the sub prime mortgage crisis was that many of the loans were originated with an adjustable rate as opposed to a fixed rate. This was initially done in order for borrowers to have lower mortgage payments on larger loan amounts. However, once these mortgages began to reset and the interest rates began to increase, many homeowners simply could not afford to make their monthly mortgage payments and foreclosures began to skyrocket.
As the market was flooded with an abundance of foreclosed properties, the prices of homes nationwide began to plummet. This caused a ripple effect, as homeowners who wanted to refinance their homes to a fixed rate mortgage were unable to do so because their home was worth less than the price they originally paid for the house. These same homeowners were now stuck in a home with an adjustable mortgage and higher mortgage payments for a house that was worth considerably less than what they paid for it. As the financial burden of the increasing mortgage payments continued to rise, many homeowners simply stop paying their mortgages leading to more foreclosures and a continued downward spiral in the real estate market.
There are many issues that lead to the housing crisis, but the main cause of the crisis was greed. Mortgage lenders and brokers were enticed by the thought of making a quick profit by originating sub prime mortgages and selling them as a collateralized security. Home owners were enticed by the thought of owning their dream home of little to no money down and easy low payments. Many parties are to blame, but greed was the primary motivator in the crisis.
Overall, the real estate market is beginning to rebound in many local markets. However, there are many home owners who are still underwater and struggling financially. A full recovery is still many years away, but in due time the market will stabilized.