Why did the subprime mortgage crisis start now ? what triggered it ?

So I am reading about the subprime mortgage crisis and the huge number of foreclosures. I have read about how subprime mortgages are loans given to people with less than ideal credit. My question is more simple. Why did this defaulting and foreclosures happen now as opposed to, say, a few years back. Did something trigger this whole crisis now?

Why did the subprime mortgage crisis start now ? what triggered it ?

Most sub-prime loans are adjustable rate mortgages. Most ARMs have a rate adjustment after 2 years. The rate of home sales began to jump drastically in 2005. Two years later (2007) the rates begin to jump and now people can't pay their higher payments. Most assumed that they could refinance since housing prices were going up so fast but by the end of 2006 home prices stalled and many people found themselves unable to refinance.

Why did the subprime mortgage crisis start now ? what triggered it ?

If you want to point to one cause, the subprime mortgage crisis resulted from the over-stimulus of the economy back in 2001. The fed reduced interest rates after 9/11 and during a recession to put the economy back on track. It created cheap money... Lenders borrowed at under 1% and lent out at over 7% and 8%...and were also able to obtain a lot of leverage (finance term). So profitability was high... wall street was making money, brokers were making money, mortgage companies were making money....

And the loans were actually good risks. They had an average life of just two years. Real estate prices rose because interest rates were low, which allowed people to refinance when their equity increased. When the average loan lasted less than 3 years, and in those three years, real estate prices rose, there was no risk... no matter what the credit characteristics of the borrower were. So the losses were negligible to non-existent. Everyone received huge spreads and had no losses to offset. Profitability was high.

Now, everyone knew that it all had to end at some point. Everyone thought it would burst when interest rates rose, like a pin hitting a balloon. But instead, interest rates stayed low and the air came out slowly over time.

Now that real estate prices are declining because affordability exceeds personal income, the risk of those loans has increased. Now, the risk of the loans far exceeds the profits that could possibly be gained.

En masse, investors (buyers of bonds) therefore fled the scene, no longer willing to invest in subprime loans. The market disappeared, losses mounted, and all existing loans were worth a fraction of their intrinsic value.

With the market shutting down, most mortgage banks, which depended upon selling their loans into the market, had to shut down. Not having a capital market will also impact banks, which also depend on a liquid capital market to function. Thus, in the end, all suffer.

Why did the subprime mortgage crisis start now ? what triggered it ?

well, people were buying more home than they could really afford, and most took our a an adjustable rate mortgage, where its fixed for 5 years, then goes up. These homeowners thought they could afford to live in the home now, fix it up, and sell it. Problem is, the housing market crashed, and its really a buyers market now. So, they are stuck in the home that they couldn't afford in the first place. Then, the rate goes up along with the payment and it makes one bad situation, as most people could barely afford the mortgage they had in the first place.

That, along with the fact that so many jobs are being lost in this country make up what is now becoming a recession, with MANY people losing their homes.

So, it mainly started now because 5 years ago mortgage were really easy to get, in any situation you were able to get a house. Now, lenders are starting to re-think their actions to give loans to just anybody, which sucks because now its going to be harder for my generation (I'm 20 right now) to get started and get a home, we're going to have to have almost perfect credit and a LOW LOW LOW debt to income ratio.

Why did the subprime mortgage crisis start now ? what triggered it ?

In short, it was the banking industries blindness in establishing loose qualifying criteria for people to get homes well above what they would normally be able to afford. This is coupled with unethical loan practices and failure to explain many of the risks associated with those loans.

Once the market turned south and values pulled back people were left in homes with no equity and were unable to refinance them when their rate turned adjustable. The same credit that got them into the mess is not getting them out of it because the banks changed the rules. They had to. They were taking losses at record rates. However, those left in adjustables with high loan - value ratios were sitting on a time bomb.

In 2008, we are supposed to have the highest number of these loans coming due. It will undoutedly be a record year for foreclosures.

I have been in the loan business a long time. For those who want more of this type of info, check this guys site out. He has a lot of articles related to this type of thing.

http://www.tomvoli.com/pay-off-mortgage-...