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Should Subprime Loans Be Outlawed?

 


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The housing crisis, which started 13 months ago, has recently gotten substantially worse. The states hit the hardest with this crisis are California, Florida, Nevada, and Arizona. Mountain House, California is the most ‘underwater’ community in the United States. Almost 90% of the people who live in this community owe more on their home mortgages than their houses are worth. The first homes in this area were sold in 2003, and since then the average homeowner who lives in Mountain House is in debt by approximately $122,000. In some cases, houses are being valued at less than 50% of their original value. It is impossible for many of these residents to even imagine being able to pay off their mortgages. Already, banks have taken over 101 properties in the Mountain House community. The housing crisis is causing these people with “underwater" homes to cut back on spending, which in turn is causing a setback in the economy. Everyone in this area is being forced to make cutbacks in order to pay their mortgages. They can no longer afford to partake in certain luxuries such as getting their nails done, going to the movies, or going out to eat. This is negatively affecting the business of local companies. The owner of a local furniture store stated that his business was down by 50%. Stores that have already gone bankrupt in this area are: Soccer World, Linens ‘n Things, and Fashion Bug.

The subprime mortgage crisis was triggered by the failure of mortgage companies, investment firms, and government sponsored enterprises who had invested in subprime mortgages. Subprime mortgages, specifically, are mortgages with higher interest rates, made to borrowers with low credit scores who do not qualify for prime loans. These loans are frequently used by people who want to increase their current credit rating. The subprime mortgage crisis started in 2000 when the Fed lowered interest rates to prevent a possible recession. This allowed for more people to buy houses, causing the demand and value of homes to increase. Lately, due to the current mortgage situation, the issue of subprime loans is controversial and can be identified by examining the impact on business, government, and society.

The current mortgage crisis is affecting US business both positively and negatively. Although the positive affects are more narrow and harder to determine, it is positively affecting the renting industry. People are finding it more favorable to rent homes and apartments instead of buying. This is because prospecting homeowners do not want to become involved in this crisis and risk having their home go “underwater". As expected, this issue has more negative affects on US business that positive. The most major affect that subprime loans are having on the economy, is obviously its affect on the mortgage market. People are no longer able to pay the mortgages on their houses, because they owe more than their houses were originally worth. In a lot of cases, the value of entire neighborhoods is decreasing due to foreclosures and delinquencies. Another negative effect that is that businesses are closing and companies are pulling in less business. This is happening because since many people owe more on their home mortgages than their houses are worth, they are starting to cut back on things that aren't necessities such as eating out, going to movies, shopping, and more. In turn, this is having a negative affect on many businesses in the United States. Since less people are buying goods and services, less goods and services are being produced. Many businesses in the US are cutting down on their number of workers or closing altogether.

In addition to business, the subprime mortgage crisis is also affecting the US government. The government is helping the companies who sold the mortgages but is doing very little to help individual homeowners. The government is involuntarily being forced to bailout certain Wall Street firms. For example, there was the $85 billion bailout of American International Group Inc. and the bailout of both Fannie Mae and Freddie Mac. While this might be viewed as a negative affect to the government itself, it can also be seen as a positive affect in a certain aspect, because if all of these financial services and insurance firms went bankrupt the economy would be even more of a disaster right now. The government is being negatively affected by this crisis indirectly because homeowners who are involved are falling behind on their tax bills which is hurting state and local governments. The government is being viewed harshly by many Americans because government officials have said that they will not help victims of the subprime mortgage crisis because these victims should not be rewarded for making bad decisions.

This crisis is also having an affect on members of the US society. Although there aren't many positive affects this crisis is having on society, right now housing prices are lower for those people and families who are looking to buy homes. This is especially helpful for first time buyers who aren't trying to sell their current house in order to move into a new house. Housing prices are so low right now, that this is the prefect time for people contemplating becoming first time homeowners to buy. Adversely, this crisis is having many negative affects on society. People are no longer able to do the things they are used to, due to increasing prices. Most people affected by this crisis are cutting back and limiting their spending to only necessities. This is preventing people from doing things that they were used to doing before the housing crisis, such as tanning, getting their nails done, shopping, golfing, and going to the movies. Society is also being negatively affected by this crisis, because people who want to sell their homes are having a tremendous amount of trouble doing so. Some homeowners are even declaring bankruptcy and are willing to have their credit ratings ruined in order to get out of their current mortgage situation. Another affect on society is that neighborhoods with foreclosed homes are also experiencing a large increase in crime.

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