Wealth, Status, and Opportunity in America
The article by Lewis helps the fortunate and unfortunate people to live through the most recent financial crisis and gain and understanding of occurrences that transpired. From the article, Lewin provides an in depth analysis of the factors and conditions, which led to the financial crisis. The most recent financial crisis is considered as the worst financial crises that ever affected the globe. This is because it was characterised by the collapse of leading companies, banks and other financial institutions. This financial crisis also brought about the collapse of the mortgage market mainly in the United States and also across the globe (Lewis, 2010).
According to Lewis the most recent financial crises are mainly attributable to the activities of the mortgage market. This is because, years before the effects of the financial crisis commenced manifesting itself, and most financial institutions increased the quantity of mortgages. This move was supposed to facilitate financial institutions taking part in the mortgage markets to realise more revenues, through servicing homeownership. In order for an individual, to secure a loan with a financial institution there are various aspects that the lender needs to consider and evaluate (Lewis, 2010).
One of the factors that the lender needs to consider is the provision of an asset by the borrower to serve as collateral when securing a mortgage (Pirounakis, 2013). The borrower also needs to assess and evaluate the ability of the borrower to repay the principal amount and interest given the duration of the loan. The rate of interest to be charged on the loan depends on the ability of the lender to repay the loan. This was attributed to the fact that interest on a loan serves as the cost of financing, and it varies based on the level of risk facing the lender.
In this situation, Lewis explains that most of the financial intuitions increased the number of people that were acquiring mortgages. These financial institutions managed attract more people, through lowering standards of qualifying for a mortgage. The standards continued to decline such that it came to a point whereby people with inability to repay the debts were also given mortgage financing. The condition further deteriorated when the financial institutions were giving debts to people without verifying the legality and economic value of assets that they were offering as collateral. It also came to a point whereby the interest rate charged on borrowing became constant for a period of close to two years. In addition, the financial institutions created another form of a financial instrument that is known as credit default swaps. The credit default swaps can be classified under financial derivatives. The mortgage lenders consequently sold the loans to bigger and well established financial institutions (Lewis, 2010). These blue chip financial institutions were repackaging the loans they acquired into various classes of corporate credit default swaps.
The corporate credit default swaps were a form of bond whose rate of interest to be earn largely depended on its class. Most of the investors in the market rushed to the investment banks to acquire these securities. These investors were speculating that it was nearly impossible for the debtors to default on their loans. This is because most of the investors rarely read the prospectuses that were being provided during the issuance of these bonds. By the year 2007, the level of interest on these bonds could not remain constant for any longer thus it increased. This increase in the level of interest rate charged brought about a situation whereby most of the people defaulted on their loans. Some of the major companies and financial instructions ended up collapsing (Gunderson, 2013).
The collapse of these leading financial institutions led to a financial crisis. This is because some of these financial intuitions realise revenues that are more than the gross domestic product of some of the developing countries. As a result, the collapse had numerous financial implications on the U.S. economy. In addition, most of the people lost their homes, as well as the prices of property, declined significantly.
Gunderson, S. (2013). The New Middle Class: Creating Wages, Wealth, and Opportunity in the 21st Century. New York: Greenleaf Book Group Llc.
Lewis, M. (2010, April). Betting on the Blind Side. Retrieved April 7, 2013, from http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004
Pirounakis, N. (2013). Real Estate Economics: A Point to Point Handbook. New York: Routledge.