Understanding The Incidents Of The Two Eight Financial Crisis

To understand the incidents that occurred in the two-thousand eight Financial Crisis one must understand what a mortgage is. Someone who wants to buy a house will often borrow hundreds to thousands of dollars from a bank. In return, that bank receives a piece of paper, called a mortgage. The bank often sells the mortgage to a third party. When an individual agrees to a mortgage, they are agreeing to pay back their loan in portions plus interest to whomever holds the mortgage. If the borrower does not repay the lender, the property will be taken back by whomever holds the mortgage; it is then sold to cover the debt. This process is known as foreclosure. If the borrower stops paying it s called a default. A default is when a debtor is†¦show more content†¦Mortgage back securities are created when large financial institutions attempted to secure mortgages. Basically, they bought thousands of individual mortgages, bundled them together, and would sell shares to investors. 3 Investors relished in these mortgage backed securities. They paid a higher rate of return than investors could get in other places, and appeared to be safe bets. Home prices increased; Leading lenders to believe the worst case scenario, homeowners would default on their mortgage, and they could sell the house for an additional amount of money. 1 At the same time, credit rating agencies continued to inform investors that mortgage backed-securities were safe investments. Investors were desperate to gain more securities. Promoting lenders to help create more of them. However, to create more, lenders needed more mortgages. This caused lenders to loosen their standards and provided loans to individuals with low income and poor credit. These are referred to as subprime mortgages.2 Eventually, some institutions begin using what is referred to as predatory ending practices to generate mortgages. They made loans without verifying income and offered absurd, adjustable rate mortgages with paym ents individuals could afford, at first, it became disorderly quickly. Subprime leading was a new practice at the time. These investments were becoming increasingly less safe. However, investors trusted rating, and continued to