What Are the Indirect Economic Effects of the Subprime Mortgage Crisis?

What are the Indirect Economic Effects of the Subprime Mortgage Crisis?

Economics for Managers

ECO306

Prof. Ann Mills

By Tonya Brown

4/12/2010

In today’s headlines, there are terms like adjustable rate mortgage, foreclosure, credit limitations and Wall Street failures hitting newsstands and televisions more so than ever before in our lifetime. “The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States with major adverse consequences for banks and financial markets around the globe” (Le Vine, S. & Magaldi, A., 2008). People who have worked hard to provide for their families have fallen prey to the easily obtained subprime loans which eventually have led them to not only losing their homes but also their American dream. African Americans and Hispanics were unfairly offered these higher interest and oftentimes unethical loans by greedy banks who were trying to make the largest profits possible on these loans. Whether a consumer has been directly affected or not by the subprime mortgage crisis, odds are that he or she will be indirectly affected by this epidemic. This paper will explore some of the indirect economic effects of the subprime mortgage crisis.

Loss of Equity

Buying a home has traditionally been one of the most profitable investments in one’s future because of the anticipated growth in the value of the home. That was until the recent housing bust. As of February 2010, 11.3 million homeowners owed more on their house than their house was worth. (McCarthy, 2010). Home prices have dropped dramatically from the inflated prices of the housing boom, which have led to this dramatic loss in the value of homes. Homeowners can no longer easily borrow against their home for large purchases or repairs nor can they rely on that equity to supplement or replace their lack of savings. Not only have the homes lost value, consumers’ total net worth has...