Senior Project: Research Paper


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Senior Project: Research Paper

  1. 1. Elliott 1Brian ElliottMrs. CorbettAP Literature18 November, 2011 Senior Project Research Paper: Subprime Mortgage Crisis Many people view field s like construction and architecture as unique, interesting andprofitable fields, but, as of now, the ongoing subprime mortgage crisis has greatly hindered thesefields of work. With so many people in debt, the quantity of houses in construction and beingbought have been reduced to a small pool compared to the previous ocean of a market. When thehousing bubble broke in 2001, the market was building up to the meltdown in the later years ofthe first decade of the century. Once the market collapsed, it created a major issue for theconstruction companies, maintenance workers, Architects and so forth. With the diminishingcareer pool, there seems to be an ongoing problem that needs to be addressed in order for futuresuccess. The early 2000’s brought on floods of new homeowners with subprime mortgages, andthe economy seemed to be in great shape with the Dow Jones Industrial average recentlycrossing the 10,000 mark. Americans were not financially prepared, and they were not aware ofthe imminent future. Chris Arnold recounts the peak of the subprime mortgages when he pointsout that “Analysts say that in September 2005, the subprime lending boom started hitting itspeak. Now a bigger wave of rate resets could mean a flood of foreclosures” (Economists Bracefor Worsening Subprime Crisis). At the end of the quote, Arnold shows the recently increasingamount of foreclosures, and he effectively predicts the future since this article was written in2007. In the next few years, the economy became progressively worse as we went entered the
  2. 2. Elliott 2worst recession since the Great Depression in the 1930’s. Along with this and, in fact, one of thecauses of the depression was the subprime mortgage crisis. Since many people could not keep upwith their, now adjusted and much higher, mortgages on their homes. One man, Mr. Pomales hada mortgage payment of 2,100 dollars per month, but over the next few months, it increased byover 500 dollar. Soon, He expects it to increase even more (Arnold). While the general populacecould handle the lower mortgage rates they paid each month, the rising rates forced many intoforeclosure. It seems that some people were barely getting by with the previous rates; so, as theywent up, the population of the lower middle class (and some other classes) could not sustain thisstandard of living. In 2007, two major hedge funds collapsed, and the United States and Europeplaced 100 billion dollars in the market to stabilize it, so the “subprime mortgage market [wouldcontinue] to be solid as long as the housing market continued to escalate and interest rates didn’tgo up…By 2006, housing prices started to taper off after rising nearly 40% between 200 and2006. They are expected to continue their decline through 2007 and most of 2008” (Parks). Inorder for the market to stay at a stable position, the housing market had to stay on its currenttrend at the time of increasing buyers and stable interest rates, but the government did not predictthe sudden drop off in the housing market which ended up causing the current mortgage crisis. At the root of this destructive crisis, is the bursting of the theoretical housing bubble.Katalina Bianco analyzes this concept in her report on the Mortgage Crisis: The current mortgage meltdown actually began with the bursting of the U.S. housing “bubble” that began in 2001 and reached its peak in 2005…It is defined by rapid increases in the valuations of real property until unsustainable levels are reached in relation to incomes and other indicators of affordability. Following the rapid increases are decreases in home prices and mortgage debt that is higher than the value of the property (Bianco).
  3. 3. Elliott 3It seems as if The United States and various other countries reached the Absolute maximum ofthe housing markets parabola, and, now it has come crashing down on a negative slope. Thepopulation continued to buy products that they, in actuality, could not afford, and this trend alsoshifted to houses as people continued to buy real estate outside their budget. While all seemedwell at the time, the population was “digging a hole” that will take several years to escape. In2005, the amount of homeowners and home prices reached their peaks as “The national medianhome prices [for March 2005] jumped 11.4 percent to $195,000 from the same month a yearago…but some analysts said the housing sector has begun to show signs of easing… a U.S.Commerce report showed a 17.6 percent plunge in housing starts for March” (Neidenberg).Since this article was written in 2005, Neidenberg did not realize the impending recession thatcame in 2007, but he accurately portrays the market at that time. In this year, the median homeprices leaped by over 15,000 dollars in accordance with the number of home buyers. The mass ofhome buyers bolstered the market before the flaws were finally brought into the light. BusinessSpot lists one of the central causes of the Subprime Mortgage crisis as “High Risk Loans: Theseare over levered loans where the financing is done more than the suggested values to be given.This results in immediate sell off when the property falls below the loan amount and to avoidfurther loss the banks commence raising the installment” (Effects of the Mortgage Crisis).Because of these seemingly cheap loans, many people’s mortgages unexpectedly reset, forcingthem to pay hundreds of extra dollars per month. At the time, these loans seemed to be a cheapalternative as to what families would normally have to pay, but after a large percentage ofhomeowners having their mortgages reset in later years, these loans would end up costing muchmore than these people could afford. Even though the period throughout 2001-2005 created a
  4. 4. Elliott 4façade that showed great success, few could have predicted what was about to happen to themarket. The disastrous effects of the subprime mortgage crisis have sent the global economyinto a seemingly unending downward spiral. Senator Charles E. Schumer created a short timelineto chronicle the crisis in 2008: “July 10: Foreclosure filings for June 2008 have jumped 53percent from this time last year…June 25: Home prices nationwide are down 15.3 percent from ayear ago.” The Senator goes on to state that the number homes foreclosed upon was over250,000 (Subprime Mortgage Market Crisis Timeline). These staggering numbers show theunmistakable evidence of how unsustainable the previous prices were. Based on the senator’sstatistics, a year ago there was close to 100,000 less foreclosures than July 2008, and theseobvious irregularities meant massive layoffs in all industries involved in construction. Withoutthe previous surplus of buyers all of the builders, architects, maintenance workers and morefaced previously unnecessary competition to keep their jobs (The Job Bored). People justentering the field in the years to come were also confronted with a job market as small as it wassince the Great Depression. The Huffington Post conducted a study of the cities that were hitworst by the recession in which they discovered that “Most of the cities on [the] list are inregions worst hit by the housing crash…[all were] booming housing markets before the recessionhit. In the U.S., just fewer than 15 percent of homes were built in the last 10 years. But in someof the cities…that number is 25 percent and higher” (Sauter). This study shows further evidenceas to the specific cause of the mortgage crisis because each city, generally, had a higherpercentage of homes built after 2000, therefore the percentage and density of foreclosures wasalso significantly higher. The 25 percent areas became the areas that were most affected in theend, and because of the previous trends, it was the predictable outcome. Throughout the ongoing
  5. 5. Elliott 5recession, these areas have faced a tougher challenge than most, but all around the country thereis a sense of despair. While society still faces the Subprime Mortgage issue, it has been four to five years sinceits start. Along with this period, there have been developments and possible solutions that havebeen created in order to ease out of this crisis. Lately, companies are hesitant to build at allwithout a guaranteed buyer, unlike before, but “Wheelock Street Capital, which has madeheadlines in the past 18 months by teaming with home builders as a private equity investor, hasacquired a coveted 364-acre tract just north of hot Raleigh, N.C., expected to be the site of about700 homes in the next five years or so” ( While relatively small when onelooks at the mortgage crisis as a whole, this investment shows a possible redemption andrecovery in future years. Over the past year and a half, Wheelock Street Capital has begun whatall building companies need to do on the road to recovery. Although there are still anunprecedented amount of people dealing with financial issues, financial stability has begun toreturn to several areas and many people in the population. This can be applied to the recession asa whole and just the subprime mortgage crisis, but people and companies need to invest theirmoney within their budget in order to create an exit from these tough economic times. It seems that America is reaching the peak of its crisis as things continue to grow worse.Ben Tracy reports that “the housing report card is ugly. In the past two years, the housing markethas lost an estimated $4.9 trillion dollars, as 59 million homes have declined in value…Nearly 1in 4 homeowners -- 10.7 million households nationwide -- are underwater on their mortgages.They owe more than their home is now worth” (Housing Crisis Getting Uglier in 2010). Sincethis is a 2010 article, it shows how the numbers continued to become exponentially larger evenjust a year ago. Even with the outrageous numbers, there is evidence to suggest that Americans
  6. 6. Elliott 6are approaching their peak with situations like the Wheeler Street Capital example. While thetimes are tough right now, there may be an end in sight. Before this crisis, fields such asarchitecture and construction would have seemed to have an unendingly great outlook for yearsto come, but current times have created a new perspective. Still, history shows that this will mostlikely be a relatively short period that will most likely be resolved before the class of 2012 is outof college, but a solution must come from the government before this plague can bring any morefinancial destruction to our nation’s populace.
  7. 7. Elliott 7 Works CitedArnold, Chris. “Economists Brace for Worsening Subprime Crisis.” NPR. N.p., 7 Aug. 2007. Web. 13 Nov. 2011. <>.Bianco, Katalina M. “The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown.” Business: Banking and Finance. N.p., 2008. Web. 14 Nov. 2011. <>.Business Spot. “Effects of the Mortgage Crisis.” Business Spot. N.p., 1 Mar. 2011. Web. 14 Nov. 2011. <>.Housing “ Wheelock Capital Lands Raleigh Masterplan Gem.” Housing N.p., 8 Nov. 2011. Web. 14 Nov. 2011. < wheelock-capital-lands-raleigh-masterplan-gem/>.The Job Bored. “How The Housing Crisis Affects The Job Market.” The Job Bored. N.p., 15 June 2008. Web. 14 Nov. 2011. < affects-the-job-market_694/>.Neidenberg, Milt. “Housing market crisis threatens economy.” Worker’s World. N.p., 27 Apr. 2005. Web. 14 Nov. 2011. <>.Parks, Samanta. “The Subprime Mortgage Crisis: How Did It All Start?” Foreclosure Data Online. N.p., 2011. Web. 13 Nov. 2011. <The Subprime Mortgage Crisis: How Did It All Start? Read more: subprime-mortgage-crisis-how-did-it-all-start/#ixzz1ddyRZXz9>.
  8. 8. Elliott 8Sauter, Michael B, and Charles B Stockdale. “American Cities With The Most Underwater Mortgages: 24/7 Wall St. .” Huffington Post. N.p., 29 Oct. 2011. Web. 14 Nov. 2011. < sunk-by-u_n_1064603.html?ref=housing-crisis>.Schumer, Charles E. “Subprime Mortgage Market Crisis Timeline.” Senate. The Senate, July 2008. Web. 13 Nov. 2011. < ?a=Files.Serve&File_id=4cdd7384-dbf6-40e6-adbc-789f69131903>.Tracy, Ben. “Housing Crisis Getting Uglier in 2010.” CBS News. N.p., 4 Feb. 2010. Web. 14 Nov. 2011. < main6167610.shtml>.