Social Science essay

Subprime Mortgage Crisis


We are facing a serious economic depression caused by subprime mortgage right now. Subprime mortgage lets people to buy the house with little or no downpayment, it sounded like a good idea because this plan lets low income class people to buy the house with little or no money, so people went out and bought the houses. People who bought the houses were happy that they have their own place and the fact that house price was going up, they even got equity loans from the bank. Equity loan is mortgage placed on real estate in it's exchange for cash, but requires borrowers to repay only the interest of the loan every month. People went out and spend more money because they have a house and extra cash. What people didn't realize is that they were in debt, if you buy a $700,000 house with no downpayment, you are in $700,000 debt plus the interest of $700,000 every month. subprime mortgage got people to buy the house beyound their ability so easily and form the bubble in real estate value.
Starting 2006, house price went down hill because of the bubble. house price was too much for people to buy because regular people makes about $20 a hour and this was no where close to making payments for the house even with their families working together. People who bought the houses already, they had to make payment for whatever they owe before the crisis which is a bubbled price, they couldn't keep up with their payments and their only hope of house price rising up was gone.
In my opinion, there was a lot of problems that caused subprime morgage but the biggest problem was the compound interest. Compound interest is interest keep adding up to whatever you owe and becomes a giant snow ball before you know it. People don't realize that if they borrowed $700,000 for 30 year plan, they are going to pay about 2-3 milion dollars total, depends on their interest rate. The banks and the investment companies knew this ever since the beginning, more money they lend to people more money they get back. They pushed people beyond their ability and thought that their plan was perfect and they will be rich. They were being too greedy and people gave up their house and stop making payments because it wasn't worth it. Like somebody who opened up and killed a goose that laids gold eggs, investment companies and banks are paying for what they did and they are going down. I think that house price should be down or people's income should be much more is the solution to this crisis.