What Exactly Was the Mortgage Crisis?

What Exactly Was the Mortgage Crisis?
By [http://ezinearticles.com/?expert=Andrew_Stratton]Andrew Stratton

Buying a home is extremely expensive, and since most people don't have access to hundreds of thousands of dollars, they must rely on a mortgage. This type of loan is typically low in interest and paid over a long period of time, between 15 and 30 years. Traditionally, a lending institution, such as a bank, would make this loan after carefully determining if the borrower would likely be able to pay back the amount. This was done using a number of qualifying stats, like annual salary, credit score, and credit history. If a person were deemed unlikely to pay back the borrowed amount, the mortgage would be denied. But, this practice changed at some point after World War II.

Certain economists insisted that the key to an economically stable life was to own a home; however, a large portion of America had bad credit or no credit at all. So, the government began a drive to pressure financial institutions to relax the guidelines on providing home loans. The issue became truly dangerous when Congress repealed the Glass-Steagall Act. This act created firm restrictions on what banks could do with the money invested with them, separating them from higher risk investment houses and brokerages. When the act was repealed, any bank could engage in high-risk investment practices. This situation resulted in the sub-prime mortgage crisis.

A sub-prime loan is lent out to individuals with bad credit at initially low monthly rates, so that they can begin living in their own home. After some time, the monthly rate increases, and borrowers are required to pay a series of large "balloon" payments. In the majority of these situations the borrowers ended up in default and then lost their homes in a foreclosure. So why would the banks make these bad loans?

This is where the loss of the Glass-Steagall Act comes into play. The potential future payment on these loans represented an asset. Since assets have value, they can be sold. In turn, banks packaged hundreds of bad loans with some good loans and sold them as mortgage securities. These securities were given different ratings by the S&P, but due to the sheer volume of securities and certain amount of misdirection involving paperwork, it was never quite clear how toxic any given security was. Eventually, the truth came to light. As millions of individuals began to lose their homes from defaulting on loans, the securities became more and more toxic, resulting in a panic. Massive losses on these securities caused the collapse of a major institution that had been insuring the investment against this exact event.

The overall impact was a dramatic loss of wealth for the most impoverished Americans, as well as the massive losses in retirement accounts, because the money from those accounts had been invested in the toxic securities. Plus, multiple violations of regulations for the paperwork surrounding the mortgages have left millions of homes in a state of being foreclosed but unsellable. The recovery will take decades, and individuals have lost faith in many of the major banking institutions.

Don't rely on a big bank for financial planning, come to Community West Credit Union in Grand Rapids. Mortgage loans with us are secure and virtually risk-free. For more information, visit [http://www.communitywestcu.org/loans_mortgage.asp]http://www.communitywestcu.org/loans_mortgage.asp.

Article Source: [http://EzineArticles.com/?What-Exactly-Was-the-Mortgage-Crisis?&id=8688186] What Exactly Was the Mortgage Crisis?