Principles of Economics – Why Banks Made Subprime Loan Mortgages And Loan To People Who Could Not Pay Back

Home ownership is a national strategy started in 1994 during the Clinton era. The move backed by congress created a ripple in housing. Usually uncontrolled economic policies tend to develop devastating financial problems without immediate remedies. As it was the case, everyone wanted in both the people and investors to share the national pie, the boom saw banks compromise their policies to give mortgage loans to everyone who wanted a loan. The problem was that even first time buyers with straining accounts without credibility were in the frontline of getting their loans.

The many reasons that made banks bit off much one was the zero down financing where no down payment was required to get a loan. As well, it applied the originate-to-distribute approach where the loan was transferable to a third party. This compromised the usual procedure and evaluation banks undertake in risks. Underwriting was done in imprudent methods where incentives were given to close as many loans as possible with limited documentation.

The mortgage mess came about also with aggressive financing; this was due to the fact of home prices going up. Loan programs went further to lower monthly mortgage payments to have as many buyers as possible. The appeal of consistent rising of house prices blinded and silenced speculators and other critics until the bubble busted due to ownership pressure letting hell loose.  In 2006 it hit the ceiling and prices plummeted, the meltdown effects are yet to be contained.

On the other hand, in the principles of macro economics, control and regulation of money supply is critical to sound economy, as is the work of the Federal Reserve. When money supply grows rapidly it triggers inflation when the supply is too slow economic growth is stunted, growth is mainly caused by GDP and prices, policies influence economic activity that is investment and expenditure. In achieving a control the reserve allows for a steady inflation of 2 to 3% (Barro, & Gordon, 1983).

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