Sub-Prime Mortgage Crisis - Essay Example

Sub-Prime Mortgage Crisis Introduction The significant issue of sub-prime mortgage crisis is considered to be the gravest financial event that affected United States in the recent past. This particular crisis ultimately led towards financial disaster and worst recession in the financial market of United States. The crisis associated with sub-prime mortgage ultimately made considerable rise in the quantity of foreclosures as well as defaults (Jaffee, 2008). In this paper, the aspect of the crisis relating with sub-prime mortgage that was faced by United States and several root causes of the crisis will be discussed.

Additionally, certain implications will also be depicted in the paper regarding the recovery of sub-prime mortgage crisis. Causes of Sub-Prime Mortgage Crisis It has been recognized that the important cause that led towards the crisis of sub-prime mortgage has been the breaking out of housing “bubble” particularly in United States that commenced in the year 2001. The concept of housing bubble can be fundamentally explained as the speedy rise in the valuation of the business market properties along with rapid decline in the home costs that ultimately increased the mortgage debt which is quite greater than the property value.

In this similar context, according to various economists, the main factor for the emergence of housing bubble is predominantly the application of lower interest charges. Consequently, the rising value of the homes as well as the liquidity along with the factor of lower interest charges ultimately fueled upon, causing the crisis in relation to sub-prime mortgage and also imposed noteworthy impact upon the economy of United States (Bianco, 2008). The other significant reason for the crisis has been the issue of subprime associated loans.

It has been recognized that a large quantity of mortgage related business organizations issued various subprime loans towards the investors. In this regard, the lenders or the investors contributed towards the emergence of sub-prime mortgage disaster by claiming themselves to be bankrupt due to the effect of foreclosures. Additionally, the emergence of new sort of specialized mortgage investors or lenders can also be regarded as one of the vital causes for the formation of the mortgage crisis.

This is due to the fact that these new kind of lenders or investors were not effectively regulated as compared with the various traditional banking institutions and thus fueled upon the mortgage crisis. Many scholars observed that especially the borrowers also played an imperative part and formed the basis of mortgage crisis. In this context, after the commencement of housing bubble along with the decrease in the value of the prices, the important aspect of refinancing became quite difficult that ultimately contributed towards causing mortgage crisis.

The diminishing rates of refinancing along with the increased rate of foreclosures were also viewed as the momentous causes that contributed towards the rise of mortgage crisis. In addition, the other decisive causes of the mortgage crisis include reductions in spending power of the investors or lenders, substantial losses especially in the stock markets, poor investments, devaluation of homes and diminishing rate of refinancing among other factors (Lim, 2008). Recovery of the Sub-Prime Mortgage Crisis In order to mitigate the vulnerable situation that generated from the mortgage crisis, the United States government should make certain deliberate efforts by restructuring the various business procedures of the different financial institutions of the country.

By restructuring, the country can recover from the crisis by significant level and might facilitate the people towards buying as well as selling the homes with confidence along with preserving greater prosperity in the economy of the country. Furthermore, the United States should introduce a pre-determined financial package in order to restrain the emergence of housing bubbles along with establishing fruitful legal regulations as well as contracts from getting rid of the mortgage crisis (Shiller, 2011).

Additionally, the United States can recover from the mortgage crisis by expanding business markets in order to manage various risks, by forming various equity insurance related policies along with income associated home loans and most importantly, by initiating significant measures in order to defend the investors or the lenders against any sort of inflationary effects (Grant, 2007). Conclusion The emergence of the sub-prime mortgage crisis imposed noteworthy impact upon the business community as well as the economy of the United States.

The different crucial reasons for the occurrence of mortgage crisis generally include the formation of housing bubble, introduction of low interest charges and the diminishing rate of refinancing aspect. In order to cope up with the situation and to recover from the mortgage crisis, the United States should focus upon restructuring the various regulations associated with different financial institutions as well as introducing enhanced financial packages. By considering the above discussed factors, the United States can recover from the mortgage crisis by a considerable extent.

References Bianco, K. M. (2008). The subprime lending crisis: causes and effects of the mortgage meltdown. Retrieved from http://business.cch.com/bankingfinance/focus/news/subprime_wp_rev.pdf Grant, J. (2007). The Fed’s subprime solution. Retrieved from http://www.nytimes.com/2007/08/26/opinion/26grant.html?pagewanted=all Jaffee, D. M. (2008). The U.S. subprime mortgage crisis: issues raised and lessons learned. Retrieved from http://www.scribd.com/doc/11531383/The-US-Subprime-Mortgage-Crisis-Issues-Raised-and-Lessons-Learned Lim, M. M. H. (2008). Old wine in new bottles: subprime mortgage crisis - causes and consequences.

Journal of Applied Research in Accounting and Finance (JARAF) 3(1), pp.3-13. Shiller, R. J. (2011). The subprime solution: how today's global financial crisis happened, and what to do about it. Retrieved from http://press.princeton.edu/titles/8714.html