Subprime Mortgage Crisis

So, this subject came up during our discussion of the muckraking argument prompt. Basically what happened is this:

The value of any house or property typically goes up over time. The United States had seen housing prices (values) climbing steadily for a long time. With the (stupid) assumption that this trend would continue, banks loaned money to people who couldn't really afford to borrow money and buy houses. That's okay, the banks said--your house will be worth more in five years than it is now. And people (again, stupid, in my opinion) said okay, give me the money. And the banks said, tell you what we'll do: we'll make your monthly payments small now, and then in five years, we'll readjust your payments. But you'll be able to refinance by then because your house will be worth so much more. We'll give you an adjustable rate mortgage, i.e., the rate will adjust in five years (called a 5/1 ARM). Eager to buy homes, people jumped at the chance.

Fast forward five years. Housing prices did NOT climb as anticipated (there is, after all, a natural up-and-down cycle to these things). And when people went to refinance, they couldn't because their homes were actually worth LESS than when they had bought them. The rates adjusted, buyers couldn't afford the new higher payments, and they lost their homes. That's why a lot of people have been buying houses on the cheap lately: they are called foreclosures, and they are a good deal if you can get them.

Part of the scandal is that it was discovered that lenders were being pushed by the big bosses to extend loans to people who really didn't make enough money to cover the debt they would owe.

Selfish companies + ignorant buyers = huge financial crisis

For more information, try these links:

http://en.wikipedia.org/wiki/Predatory_lending

http://www.subprimelendingcrisis.com