Mortgage crisis, deja vu?

Just as the United States of America’s mortgage crisis in 2008, the COVID-19 crisis will also have an effect on the whole world, and possibly, similar consequences. Assuming that, let’s do a small recap of what exactly happened in 2008.

A few years before 2008, subprime mortgages were being granted to people left and right. This particular type of mortgage is usually available to people who have a poor credit score, as such, these loans have a tendency to have a higher interest rate than other mortgages. Hence burdening people with low credit scores even more.

For years, predatorial tactics were carried out by loaners and banks, which lead to a lot of people signing these loans that were way above their financial capabilities, and eventually, they would be unable to pay. As the Federal Funds rate raised, the loans’ interest rates raised as well, which in turn made these loans almost impossible to pay for some people.

Most of these loans are secured by the collateral of the specific real estate property, and as an outcome, the non-compliance of these loans led to a crash in the mortgage market. For the economy, the consequences were severe, financial institutions and banks collapsed leaving numerous people in ruin.

Photo by Tom Rumble on Unsplash

Currently, as a result of the enormous and continuous rise of the unemployment rate in the United States of America, people haven’t been paying their rents and mortgages, or have been delaying those payments. Taking into account, that for example, rent is associated with the actual home’s value, if people stop making their payments, said values might drop. And as a consequence, the financial assets linked to those mortgages might drop as well.

Unfortunately, this situation puts enormous pressure on banks that have a business focus on mortgage loans. If these small banks go under, there’s a strong possibility bigger banks buy them, and these big banks have a higher tendency of foreclosing mortgages.

To try and delay this situation, the American government has been granting moratoriums, handing out checks, and buying mortgage-backed securities. The danger in doing so is that it only works in the short term, and when these measures end, people will be left with a lot of accumulated debt. The people who are already struggling to make their payments won’t be able to do so when they have to pay the accumulated debt when the moratoriums end.

With the continuous increase in unemployment and economic tension, the economic consequences are still not clear. But like with everything in this pandemic, the future is still unknown. It will all depend on the government, what kind of extra support will it provide to the people, and how the labor market will react.

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