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    Factors leading to the subprime mortgage crisis, adjustable rate mortgage

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    First, read "New Century Brings Trouble for Subprime Mortgages" (see attached file). Answer the following questions:

    1. As a reaction to problems in the subprime area, lenders tightened lending standards. What effect do you think this had on the housing market?
    2. What is an adjustable rate mortgage (ARM)? Do you think this type of mortgage is more attractive to new homebuyers than traditional mortgages? Explain with reasons.
    3. Which of the following factors was most influential in the crisis: low interest rate environment, loose underwriting standards, or innovations in mortgage financing? Select one and explain why.

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    Solution Preview

    1. The impact of tightened lending standards led many subprime lenders to raise the minimum credit score to qualify for a home loan. Also, home buyers were required to show proof of income instead of showing no proof. Finally, home buyers were required to put money down on a house instead of obtaining a zero down home mortgage (The information was obtained at http://www.hawthornproperties.com/effects-of-a-tightening-credit-market "Effects of a ...

    Solution Summary

    An examination of the factors that led to the subprime mortgage crisis, and the definition of an adjustable rate mortgage.