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.