bornAfrican - The Convergence of Africana

A Look at the Subprime Mortgage Crisis

Posted March 19, 2008 · Charles O

For those interested in understanding the subprime mortgage crises that is currently shaking the U.S. economy, this diagram, associated with this Wikipedia article of the same subject, does a bang-up job of explaining the interrelationships between certain causes or enablers, their effects or impacts, and the responses triggered—from the perspectives of key player-entities. To summarize:

• Homeowners: Adjustable-rate mortgages reset, leading to an increase in mortgage default rates and foreclosures;

• Housing market: Excess home inventory lead to declines in new home construction and lowered demand for housing inputs, as well as reduced GDP growth and recession risk;

• Financial institutions: Increased risk and debt tolerance enabled loan incentives—so-called “teaser rates”, leading to eventual losses in subprime mortgage-back securities, and stock price reduction or bankruptcy of weaker lenders;

• The Economy and Financial Markets: Creation of new, sophisticated subprime mortgage-backed securities that carry investment-grade ratings, which encourage housing-related (over-) spending and lead, ultimately, to stock market correction, risk premium increases, credit/liquidity crunch, and recession risk when those subprime mortgage-backed securities fail;

• Government: Relatively high interest rates and limited regulation of non-bank lenders lead to an emphasis on growth over containment of inflation and, ultimately, downward pressures on the dollar—among other things.

 
Subprime diagram: http://en.wikipedia.org/wiki/Image:Subprime_diagram.png.
Stock Image: latinaviva.com.

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