Subprime Meltdown Hbr Case

1440 words 6 pages
The debacle that is the subprime crisis is said to be one of the worst in history, and sadly, I do not think we will learn enough from it. There are many factors that contributed to this situation and I will try to focus on a few I feel are most important. I realize that this is a finance class and the focus should be on the financial institutions aspect, however, this scenario played out in the real world where there are almost infinite variables. As a 1st generation immigrant, I can appreciate the spirit of this lending; it has allowed many illegal aliens in my eastern European community to be able to purchase a house regardless of the fact that they couldn’t document income since the worked “under the table.” I know many families that …show more content…

This was very lucrative to many people because it presented high rewards with virtually no risk (except being over-leveraged) to them; even if they are not able to do anything with the house, all they would lose is the house since they did not issue a down payment. They wouldn’t care so much about the effect on their credit score because they could easily obtain another subprime loan and buy another “investment property.” A lack of information and understanding, and sometime outright lies, from the lenders further fueled the fire. I am not saying that everyone did this; my wife and I bought a house in early 2008 with a 5 year ARM, since she had just not too recently started her job and I was in school, with the intent to refinance as soon as possible before the 5 years were up. Luckily we were able to refinance. I have 4 close friends that all did the same thing but purchased their home a few years earlier than us so that their 5 years were up right in the middle of all this chaos. None of them were able to refinance their loan since now their loan amount was for more than their house was worth. All of them have lost their house through a short sale. Again, I am not saying that all