Mortgage – Text
Check unknown vocabulary before you read the text:
Interest rate – the percentage of a sum of money charged for its use
In addition – also
Bet – the money risked on a gamble
Skyrocket – go up fast
Equity – the difference between the market value of a property and the claims held against it
Wisely – with good sense or judgment
Subprime – before the right time
Fraud – a trick
Accuracy – exactness
Adjustable rate – a rate that changes
Foreclose – to take away the right of the mortgagors to redeem their mortgage
Default – failure to meet a financial obligation
Mortgage crisis
Owning a home is part of the 'American Dream'. However, homes are expensive and most people need to borrow money to get one.
In the early 2000s, mortgage interest rates were low, which allowed one to borrow more money with a lower monthly payment. In addition, home prices increased dramatically, so buying a home seemed like a sure bet.
With home prices skyrocketing, homeowners found enormous wealth in their homes. They had plenty of equity, so why let it sit in the house? Homeowners refinanced and took second mortgages to get cash out of their homes' equity. Some of this money was spent wisely, and some simply maintained a standard of living while wages stayed stagnant.
Banks offered easy access to money before the mortgage crisis began. Borrowers got into high-risk mortgages. Even people with bad credit could qualify as subprime borrowers. Fraud on the part of homebuyers and mortgage brokers helped make the mortgage crisis more serious. Mortgage applications were not checked for accuracy as well as they should have been. As long as the party never ended, everything was fine.
Unfortunately, the mortgage crisis began. Home prices stopped going up. Borrowers who bought more home than they could afford stopped paying the mortgage. Monthly payments increased on adjustable rate mortgages as interest rates rose. As homeowners discovered that they could not afford their homes, they were left with few choices. They could wait for the bank to foreclose, they could renegotiate their loan in a workout program, or they could just walk away from the home. Of course, many also tried to increase income and decrease spending but they were already on thin ice.
Once people started defaulting on loans in record numbers, the mortgage crisis really heated up. Banks and investors began losing money. Financial institutions decided to reduce their exposure to risk very quickly, and banks hesitated to lend to each other because they didn’t know if they’d ever get paid back. Of course, banks and businesses need money to flow in order to operate. With bank weakness came bank failures. The general public saw these high-profile institutions failing and panic increased.
Lawmakers, consumers, bankers, and businesspeople wanted to reduce the effects of the mortgage crisis. It set off a dramatic chain of events, and will continue to unfold for years to come.