Subprime lending refers to the act of issuing loans to people who may experience difficulties servicing them due to factors such as unemployment and situations that require medical attention on a regular. These loans are offered to people whose probability of failing on their repayment schedule is very high. Characteristics of loans issued under this category include high-interest rates, unfavorable terms of repayment, low quality collateral (Chukwuogor 45).
These characteristics are meant to cater to or the high risk that is involved in issuing the loans. These loans were the major contributor to the 2007-2008 financial crisis that had far-reaching financial consequences that affected the global economy. Proponents argue that these loans help people who cannot access the credit market due to their unfavorable economic situations. Subprime lending contributed to the housing market crisis because many of the borrowers defaulted, resulting in the bursting of the house-price bubble (Moseley par. 5). This affected house valuations negatively, forcing investors to abandon mortgages that were bundled under asset-backed securities.
The U.S government influences the real estate market by offering loan guarantees, tax credits, and loans for commercial development (Sowell 34). On the other hand, the federal government has the overhand with regard to the design used in developing estates and neighborhoods. According to government reports, the federal government spends about $450 billion on the real estate market (Chukwuogor 47). This money is distributed in expenditures such as loans and tax incentives.
This money impacts the real estate market significantly. The government participates in certain activities that have a direct influence on the success of the real estate market. These activities include infrastructure provision, zoning, implementation of subdivision regulations, and approval of new development programs(Sowell 38). The government also influences the real estate market through its policies and legislation on subsidies. These have an effect on the price and supply of property. The government boosts demand by giving real estate developers tax credits, deductions, and subsidies that lower the cost of property development (Chukwuogor 49).
On the other hand, the government is able to influence lending practices by funding banks and financial institutions as well as offering tax incentives. The U.S real estate market is very large. Therefore, it is important for the government to take part in real estate lending in order to enable people who cannot afford regular mortgages to own homes.
Lenders/mortgage bankers/mortgage brokers are to blame for the housing market crash. The market crashed primarily because people too loans that they could not manage to service. Lenders made it easy for people to take loans despite the fact that the majority of them were not properly qualified for credit services (Brezina 35). They were motivated by greed to make more money because subprime lending attracts high-interest rates.
In order to take advantage of the soaring house prices, financial institutions created financial products that attracted people, even those who were not eligible for credit (Sowell 48). In addition, they did not conduct due diligence in order to determine the financial situations of borrowers. Borrowers cannot be blamed because their credit status was approved by lenders who wanted to make more money by taking advantage of the housing market (Sowell 48). Many borrowers were excited by the prospects of owning their own homes. Government-sponsored enterprises also played a role in the proliferation of subprime lending (Brezina, 36).
However, the majority of the loans were issued by private lenders. Private lenders were determined to outdo government-sponsored enterprises in offering credit services to low-and-middle-income borrowers who were excited to own homes.
Currently, there is a shortage of affordable housing in the United States. In particular, it is difficult for low-income people to get decent rental housing. This shortage has been caused by the high costs of housing construction that have prevented investors and home developers from tapping the large real estate market that targets low-income earners (Kotkin par. 4). The percentage of American families that are wallowing in financial instability and economic distress is so high that homelessness is on the rise. For instance, it is not possible for people earning minimum wage to afford decent housing in nay American state.
On the other hand, the number of people in the low-income group is increasing by the day while the number of affordable housing units is decreasing. This problem is resulting in high cases of homelessness, which is fueled by high rates of unemployment. Unless building costs come down, shortage of affordable housing will persist and become a national catastrophe (Kotkin par. 6). The most viable solution to this problem is for policy makers to enact legislation that advocate for higher incomes because low incomes are main cause of the housing crisis.
The government can assist low-income families by offering financial assistance in order to encourage them to allocate more of their incomes to buying homes. On the other hand, eradicating certain government regulations could ease the problem. Local government regulation promotes land zoning that limits the activities of developers in significant ways (Sowell 64). Government regulations only encourage the construction of quality housing units that have high costs and therefore attract high prices in the real estate market.
Works Cited
Brezina, Corona. America’s Recession: the Effects of the Economic Downturn. New York: The Rosen Publishing Group, 2011. Print.
Chukwuogor, C. The U.S Financial Crisis and Economic Recession 2007-2010: Causes, Local and Global Implications, Actions Taken, and the way Forward. Philadelphia: Chiaku Chukwuogor, 2012. Print.
Kotkin, Joel. America’s Emerging Housing Crisis. 2013. Web.
Moseley, Fred. (2011). The U.S. Economic Crisis: Causes and Solutions. 2011. Web.
Sowell, Thomas. The Housing Boom and Bust. New York: basic Books, 2010. Print.