How The Sub-prime Lending Crisis Affects Borrowers

When I purchased my two bedroom house six years ago, I couldn’t possibly have known the American economy was about to be thrown into turmoil by the sub-prime lending crisis. At the time, I’d been worried because the housing prices around the region had jumped up quite a bit and wanted to make sure I could purchase a home in my area. Sure, the exponential increase in real estate values seemed odd – the continual price leaps couldn’t be sustained forever and some borrowers were likely to be hurt by spiraling costs – but I felt that, even at the worst possible eventuality, I’d be able to inevitably sell my home in a matter of months and make back all my original costs plus a good deal more.

While it seemed strange that I’d be able to sell the home for 150 to 200 percent of the original sales price after only a few years, the temptations of easy money outweighed the potential risks. I did begin to wonder about the notion of so many new home-owners taking out mortgages they couldn’t seem to reasonably qualify for, though. After all, even if the initial adjustable interest rates sub-prime lenders offered were relatively low, at some point they’d have to go up. More worryingly, many of these were negative amortization loans that, from day one, would only increase loan balances and, with compound interest, even the minimum payments for such loans would be outrageous.

As had to have happened – no market goes up forever – the economy inevitably took a free fall, with housing prices being the most quickly affected, and the chickens have come to roost for the sub-prime lenders. The fall has been steep and sudden, and a number of friends and family have been personally hurt. While many of them have also lost money in the stock market, most kept their trading to reasonable levels and haven’t too directly suffered financial set-backs – but their moderation was precisely because everyone understands that unprecedented spurts of growth lead to market correction as surely as the setting sun. In terms of the housing market, too many borrowers seemed to believe the good times would last forever.

Unfortunately, as the falling economy affected the home values and the loss of theoretical equity ruined sub-prime mortgage lenders, the sub-prime crisis is now preventing the larger national economy from an easy rebound. It’s a vicious circle with no end in sight. Homes continue to be foreclosed upon, consumers are scared, and fewer and fewer potential home-owners are willing to take on the risk. This, too, only hurts home values and by extension our country’s financial predicament. As real estate sits for years on the market unsold, not only does this exacerbate slipping home values, but construction of new housing necessarily falls as well. Whatever temporary gains have been made by productivity or trade with lowered dollar value, the home value and loss of new construction caused in part by the sub-prime mortgage crisis, prevents an easy economic recovery from America’s de facto recession.

While those initial adjustable rate of sub-prime mortgages should continue to rise – at times, to double digit levels – there have been some steps taken to prevent foreclosure. Worried about the amount of borrowers suddenly considering bankruptcy protection, members of the government have been acting to provide a sort of interest freeze and possible deferment of payment. The United States Treasury department, spurred on by a number of senators and representatives, has sought to artificially delay the looming housing crisis in order to, primarily, create more interest in home purchase to create a temporary stimulus that should be sufficient to spur consumer spending and lure new investments from local and foreign industries.

From an ethical and practical standpoint, I wholeheartedly applaud this suggestion and believe it should be carried through as quickly as possible, but other guidelines should be imposed to ensure nothing like this even happens again. Part of the problem originally was that too great a liberty was offered to the sub-prime lenders. Not only did they begin to offer mortgages to consumers that would have never approached traditional customers, but the sheer amount of financing options available confused many potential borrowers who’d choose (or be pushed by mercenary loan officers and realtors) potentially ruinous loans. There should be a strict set of resolutions passed that limit how many alternatives may be mentioned to applicants may be offered as well as some sort of clear list of criteria each borrower must pass before qualifying for new mortgages. Conventional loans and those mortgages attached to homes where economic turmoil have not dramatically impacted home value aren’t doing that badly, after all – the worst thing about the sub-prime crisis is that it only affects, in the short term, people already doing poorly. Not only have the traditional or conventional mortgage houses maintained reasonable interest rates, they’ve remained largely functional and viable. Such guidelines will help the economy and, more importantly, aid the desperate homeowner – NEVER trust a company urging an adjustable loan. At the end of the day, your average consumer spending should increase, and home values should grow larger (or, at least, the rate of foreclosure would fall). Of course, for this to happen, earnings must rise to meet the growing recessionary inflation and, even through publicly financed program, unemployment should be kept to minimal levels. Purely for the good of the over-all economy, the housing crisis must be averted as quickly as possible, and the American government needs to take the initiative and lead us back to solvency.