I worked as a home loan originator in 2006, through 2007. As a result, I experienced several situations similar to scenes featured in the movie The Big Short, based on the book by Michael Lewis. For example, when the credit market dramatically changed in 2007, I knew the credit market was going to burst. In fact, in 2006, I easily generated over 125,000 dollars in a combination of company fees, origination fees, and yield spread premium. In 2007, the financial industry changed forever with the burst of the credit bubble, which left behind a trail of destruction. The ease of refinancing a home mortgage in 2006, become increasing difficult in 2007. Ultimately, home values plummeted across the nation. At that …show more content…
Suddenly, in dramatic fashion, Bear Stearns went from a Wall Street powerhouse to near valueless. In fact, a scholarly document on Bear Stearns states, “Federal Reserve Chairman Ben Bernanke, desperate to avoid a sudden collapse that might cause a full-fledged market panic, invoked a little-known 1930s legal provision to engineer a Sunday fire sale of Bear Stearns to banking giant JPMorgan Chase for a mere two dollars a share” (Fox). Quickly, in the eleventh hour Ben Bernanke brokered a deal with a Wall Street firm to save Bear Stearns, in other words, this action showed just how large of an impact the closing of Bear Stearns would have on the economy. For instance, Fox states, “What turned a simple price decline into a crisis that killed Bear Stearns was the way many financial firms (hedge funds and investment banks, especially) generate their profits: by making bets with borrowed money. To borrow that money, they have to put up collateral--for example, mortgage securities” (Fox). Naturally, if someone borrows money then gambles with that borrowed money in the long term they will lose that money. Actually, the beginning of the end for Bear Stearns, started with the sharp increases in delinquencies from homeowners. To put it in other words, the rise in mortgage defaults caused intense decreases in the values …show more content…
In the absence of oversight, lending became a wildcat enterprise. Mortgage brokers easily deceived home buyers by promoting subprime loans, and then they passed on bundled documents to unwary investors. Additionally, the increased market power of originators of subprime mortgages and the declining role of Government Sponsored Enterprises as gatekeepers increased the number of subprime mortgages provided to consumers who would have otherwise qualified for conforming loans (Subprime mortgage crisis). Subprime mortgage lending became a response to the growing income inequality, as the United States’ skewed income distribution. These loans offered at a rate above prime to individuals who do not qualify for prime rate loans. The loans were made to people who have no other way to access funds and little understanding of the mechanics of the loan. Subprime loans by and large were issued without regard to what will happen if the borrower can repay the loan or not. Subprime loans commonly have adjustable rates that have payments that will increase dramatically when interest rates rise. Subprime loans were usually classified as those where the borrower has a FICO score below 640. Subprime loans can be based on credit scores alone. On the homeowner’s home loan application subprime loans would have the option to use a stated income or even no income or asset verification at all. Special items