The Mortgage Crisis: Who is to blame?
Abstract
My Senior Individualized Project started with my internship where I worked as a
law clerk in the City of River Rouge's Legal Department in River Rouge, Michigan. The
majority of my work involved researching information for cases. During the time I was
there, the City was having problems with housing violations. Out-of-state investors
owned many homes in the city's neighborhoods, but failed to take care of them. The
Legal Department had trouble prosecuting the property owners because of their distant
locations. I started asking myself questions about the investors and why they were
interested in owning multiple homes in River Rouge.
Most of my answers led to the current state of the housing market. I learned that
the reason many investors were able to purchase multiple homes for cheap was because
of the housing market bust. From the mid-90's to 2006, housing prices skyrocketed
because housing was in very high demand. The reason for the rapid increase in demand
was the sub-prime mortgage market. This new market made mortgages available to
everyone regardless of income and credit history.
Investors from around the world purchased mortgage-backed securities, which
were a form of investment that paid the highest return rates at the time. By selling
securities, banks minimized their risk of lending to the riskiest of clients. The housing
market was doing so well that almost all investors were pouring in as much money as
they could afford into these mortgage securities. Eventually, foreclosure rates increased
because risky clients could not afford to keep up with their payments. Multiple banks
failed from their security investments and the economy suffered. The consumers failed to
make smart decisions. Many did not realize that an adjustable rate mortgage's interest
rate could become very high. Investors became too greedy when it came to purchasing
securities. The government failed to supervise a mortgage market in much need of
supervision. The consumers, investors and government need to be held accountable for
their actions. They are the contributors to the market bust.