Mortgage Crisis in the United States

Mortgage

Mortgage

A loan on a house

Mortgage backed securities (financialization)

A derivative that takes individual mortgages in which banks can only be repaid by the spender, collects all of them and sells to a third party

• banks would only make money on repayment, now not the case

• The risk is now in the hands of the third party

Chances the incentives of mortgage loans

Banks would only make money on repayment, now not the case. The risk is now in the hands of the third party.

Deregulation in neoliberalism

Before 1999, banks could not offer mortgages to masses of third parties. Freed up banks from just individual mortgages to make more profits.

Subprime Mortgages

A group of potential borrowers that are not good risks, leads to higher interest rate.

Teaser Loan

Offer an easy affordable rate for first years of mortgage, then increases dramatically during the later years. Misleading attractive terms at the beginning of the loan.

Adjustable-rate mortgages (ARMs) + Us Crisis

Mortgages with low initial "teaser" rates that last for the first two or three years and then increase afterward.

• banks would keep offering these loans to subprime borrowers

low interest environment

Interest rates dropped extremely low, making housing suddenly very affordable.

Emergence of the Crisis 2006-2008

Increase in interest rates led to an increase in delinquency and foreclosure. People started struggling and unable to pay it back, leading to a decline in housing prices. Financial firms started to fail.

• mortgage backed securities aren’t being paid off

• American and European governments had to pay off to keep economy afloat

Who did banks before US Crisis look to offer predatory mortgages to after the sale of houses balloons?

Subprime Borrowers

Fixed Rate Mortgage

interest rate doesn't change, less risky.

Variable Rate Mortgage

interest rate is linked to the bank's policies.