What if subprime mortgages made a comeback?

What if subprime mortgages made a comeback?
By
9/19/2014
Updated:
9/19/2014

The United States subprime mortgage crisis was an extraordinary event that coincided with the recession in 2007. The catastrophic results triggered a significant decline in home prices, mortgage delinquencies and foreclosures. In addition, the collapse of Lehman Brothers sparked a global panic along with a valuable lesson to remember.

This had a serious consequence on the American economy and resulted in skyrocketing unemployment rate that nearly reached a great depression. Recently, there has been talks about the possibility of reintroducing subprime mortgages by pundits, yet there seems to be a fundamental problem with looking back in the rear view mirror more a little more closely.

According to a Guardian blog post the idea of subprime has been surging because the economy is creating jobs again, Wall Street is performing admirably and unemployment continues to decline. Nevertheless, the idea of it is just simply wrong and terrible.

One of the problems is finding people to qualify for mortgages because there is a high demand for credit scores and perfect lending history. Because of the financial crisis a lot of folks suffered the consequences of probably losing their jobs, therefore, unable to pay the loan and forced to foreclose on the property. So naturally offering these irresponsible loans with higher interest rates, and greater risk is déjà vu.

What needs to perhaps change before discussing any new mortgages offers is that job security needs to exist and wages need to increase. Why? A recent survey by the Federal Reserve found the medium income dropped 12.4 percent between 2004 and 2013. All of this represent less purchasing power and putting money the side.

Banks will make it very difficult to lend in spite that prior to the start of the recession responsible lending was not on the priority list. For example, Buddy Loans uses a different approach in the sense that it does not do a credit check and instead accepts co-signer or a collateral if the party is unable to meet the conditions of the loan borrowed. The problem nowadays is requiring practically perfect credit knowing full well the global crisis hit many corners of the globe. 

 In a way, the housing market is far from reaching the healthy levels of investment prior to the recession. The idea of trying to lend or sell mortgages as subprime is simply making the same mistake again.

Lessons about the financial crisis and rethinking economics

These days you will come across various different economists with different models and analysis on the current economic environment. One revealing post by New York Times columnist and professor of Economics at Princeton University-Paul Krugman-discusses the idea of applying a new approach to economics.

Paul Krugman is one of the few serious economists that can offer a comprehensive snap shot on the economic landscape. He has been very vocal towards, offered substantial evidence for policy makers to put in place logical economic policies that will benefit and stimulate the growth for the U.S economy

In his opinion column, he discussed the conference which was organized by a student-run group on the idea on how to rethink economics. Krugman years earlier before the crisis had predicted the bust of the housing bubble and inevitable financial crisis. The problem is in his opinion comes down to economists not doing their homework and should stick to the basics of Econ 101.

One of the preludes of letting the market take care of itself without government oversight has disastrous repercussions. There is no such thing as too little or too much government supervision. Unfortunately for the conditions to radically change in the housing market more jobs have to be created and wages have to be increased. Without savings in the hands of consumers, without the confidence and the guarantee of return on investment do not count on people to purchase houses any time soon.