Subprime Loans are What Caused the Financial Crisis?

Posted on | April 24, 2009 | 1 Comment

Subprime loans are one of the main reasons we are in a global financial crisis.  When loans for over $250,000 were given out to people who made less than $50,000 a year, you knew a problem would eventually arise.  There is no way that someone can afford to pay a loan that is FIVE times their annual salary before taxes.  These subprime borrowers grew in great number during the 1990s and early 2000s.  There were a few economist who saw this coming but many laughed in their faces; “the price of a home never drastically declines.”

The mindset that something that goes up will not come does has caused the global economy to wither.  After decades of allowing loans to the wrong types of borrowers, the whole world is suffering.  When the largest economy on the globe takes a hit everywill will see the effects.  Unfortunately, it wasn’t just a “hit” that America took, it was repeated haymakers to the jaw.  While the entire meltdown was not the fault of subprime loans, much of it was.

Subprime loans kicked off the global meltdown when subprime borrowers could not make their payments and were foreclosed upon.  It was then a ripple affect that accelerated causing the stock market to fall off a ledge.  A large amount of the money on Wall Street was involved in real estate in some form or fashion.  With the value of homes dropping like a rock, it was only time before we saw everything else take a nose dive.  That is where we are today and ultimately, we can blame the beginning of this financial crisis on subprime loans.

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