Archive for the ‘Economic Conditions’ Category

The United States Credit Crisis

As you’re probably well aware, we have a problem in the United States; it’s the financial system. Our economy and the systemic problems we are facing now threaten the security and stability of the dollar now more than ever before. This can be proven not only through the media and the actual details of the damage itself that has been done by our risky decision-making, but by the continual rise in the price of gold as investors retreat from securities to find a safe-haven. Bail-outs of major banks and reckless spending by our government have caused a national deficit larger than any ever recorded in the history of our country. Inflation is hitting us where it hurts the most, our wallets. When this is coupled with higher gas prices mostly from oil production being decreased due to global turmoil and natural disasters here
domestically, one must wonder if a collapse could take place.

It all began with greed. People with insufficient credit scores (the inability to pay their bills), which directly translates to lower income persons and poor judgment in financing decisions, to purchase homes wanted to live beyond their means. Major retail banks and mortgage lenders saw this opportunity to charge higher interest rates and profit further. They never saw what was coming.

The United States credit crisis was primarily caused by the offering of so-called “safe” investments by banks and mortgage companies and lenders. These types of loans were called sub-prime mortgages. When a borrower would not qualify for a traditional 30 or 15 year Fixed (Fannie Mae or Freddie Mac Agency) loan, the borrower was typically referred to a sub-prime mortgage lender. Sub-prime mortgage lending would provide you with a two or three-year ARM (adjustable rate mortgage – meaning not fixed). The starting rate would be anywhere from 8-11% (yes, that’s right) and would be fixed only for the two or three year term. For ever year after that term that you kept the loan, your interest rate would increase two percentage points. So, you could end up with a 17% interest rate in year five.

As if what I just said wasn’t bad enough, these loans were being handed out to people who couldn’t pay their bills in the first place and typically had pre-payment penalties of astronomical amounts, so you would have to pay that and closing costs to refinance to even keep your home without selling it. What would happen when someone defaulted? The bank would foreclose the loan and sell the house for what they could get to recoup their losses. Since appraisal values are based on what your neighbor’s house sold for, your house dropped in value, leaving no room for you to refinance out of YOUR sub-prime loan, so you would foreclose, causing a domino effect.

Lenders started losing money left and right, and Wall Street caught wind of this, so they pushed the halt button on purchasing these loans which they had previously been packaging up from the lenders and selling them as mortgage-backed investments at home and over-seas. The sub-prime lenders went out of business, along with everyone who had invested in sub-prime mortgage lending. Major banks required government bail-outs to stay afloat and the time-bomb that we had created was felt overseas because foreign economies had made these investments alongside us. The financial system requiring the government to hold it together has caused a behemoth national debt that could ruin the dollar in the end.

Today, we see banks reducing the amount of money they can extend to people starting small businesses or wanting to finance, which has earned the label “The Credit Crisis.”

W. Paul Stogner