Between the year 2000 and 2010, the global economic crisis that has occurred has been linked to an increase in mortgage securitization. Mortgage securitization is a process that begins with the buyer of a home and involves a mortgage firm and a broker. When a buyer decides to purchase a home, he or she needs cash to pay the seller. To access this cash, the buyer consults with a mortgage broker who secures funds for the buyer from a mortgage-securitizing firm. The securitizing firm can then be able to develop new securities that they can offer to investors. Securitizing of mortgages loans has been the main reason that contributed to the global economic crises. Several reasons have been linked to the financial crisis.
Back in the early 1990s and 1980s, buying homes was only possible for buyers who had a steady and adequate flow of income. The huge incomes allowed them to have the ability to maintain fixed payments on mortgages. However, the government sought to increase the number of individuals owning homes by allowing approval of sub-prime standards by the regulators. This process involved securitizing of nonqualified mortgages. This created an increase in risk for the investor since new securities created would not be guaranteed complete payment.
Additionally, another reason that contributed to the financial crises was the decision by the Fed to lower interest rates on the mortgages to ensure that the recession would be avoided following the 9/11 attacks. The consequences of this resulted in additional people having the ability to own homes through mortgages.
Mortgages were normally paid using a fixed payment mortgage plan, which involved high payments. The beginning of using adjustable rate mortgage payment plan (ARM) meant that most of the homeowners would be in a position to make low payments to their mortgages. The disadvantage with the ARM payment plan was that the rates were subject to change based on the existing market situation. This then meant that the loan balance would continue to increase since inflation was increasing.
Mortgage brokers were concerned with increasing their commission hence they resulted in looking for additional customers to use the nonqualified mortgages without checking or validating their capability to make the required fixed payments for the mortgage. Furthermore, the regulations on mortgaging were not concerned with how the mortgage brokers verified or sought any form of verification from the potential homeowners to qualify for a mortgage. Further, the top officials for the securitizing firms sought to increase their profit margins hence did not focus on the quality of services but rather they focused on increasing numbers associated with mortgage customers. Additional mortgages meant that they could increase and develop new securities for the potential inventors.
The true value of the new securities could not be properly established using the models developed as most of the conditions affecting how the securities behaved were neglected. Additionally, securitizing firms manipulated the rating agencies to falsify the true risk value of the new securities to ensure that investors would continue investing the securities. Most of the securities were high-risk securities.
The problem escalated when homeowners failed to complete payments on the mortgages. This led to a decline the price of the mortgage-associated securities. Most of the financial institutions involved went under. Banks were not in a position to grant loans to support the construction and manufacturing industries hence an increase in unemployment.
