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Mortgage and the Chaos It Brought

I have been hooked about discussing every nook and cranny relating to business and economy for a while now.

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With the dawn of the new millennia, humanity welcomed the modern era with great enthusiasm. People conducted parties worldwide, and everybody was happy to see a new light after the economic crisis two years ago struck them. After the 1998 crisis, people were optimistic regarding the potential new millennia could bring. And they were right because humankind had not been that advanced in history at that time.

Nations began developing and increasing their output in their respective fields. The economy was healing, and protests sparked by of last economic crisis were starting to subside. Economists also believed that this growth would not leave nations that grow steadily over time. They were only worried about one thing that might undo the progress— a bubble. And in the USA, the threat of a crashing economy wasn't understood by people.

Economists were right about their worries. The bubble burst and 2008 were today known as the 2008 financial system crisis. The stock market crashed and seemed useless. The unemployment rates skyrocketed, and the cost of daily goods kept increasing. Subsequently, people sparked protests demanding the government to help them from this disaster. But the government bureaucracy wasn't that simple, and the US government received the blame as a result.

Mortgage Paper Is the Oil

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The 2008 financial crisis was the result of the wrong steps at mortgage investing. For defining, a mortgage is a paper that shows who must an individual pay to off their credit. People take a loan from the bank to buy a house, and in return, the bank receives a mortgage. But other interested parties could also purchase the mortgage. So, the mortgage may be called a limited-time stock due to its nature. This mortgage lending was the massive contributor to the crisis that later abrupt.

Dealing with individuals one by one is an exhausting task. Hence, large financial businesses formulated a way to gather all mortgages and sell them to interested investors. This system is called mortgage-backed securities. In essence, investors could pour their money into one of these programs and expected the sweet interest paid by house buyers. To combat the increasing demand of mortgage paper, corporations try to lower the requirement to buy a house with a loan. And this idea was the spark that burned the economy.

Before this, mortgage investing was a lucrative investment because of its strict requirement. People needed to have good credit and money to ensure they can finish their payment. But when these requirements were lower, the risk of investing kept getting higher. If an individual failed to pay off his mortgage, it would be called a default. Bank would receive the house back. But for instance, if John bought a home for a million dollars last year, John would most likely try to default to ensure he won't pay for a house costing one-fifth of it. Credit agency mismanagement played a significant role in this problem.

Agency Unawareness Is the Fire

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People referred to an agency for their investing project. If a trusted agency gave a high rating for a particular investment, investors would follow their suggestion and poured money there. The investing agency didn't expect that businesses dropped the requirement needed to have a loan. So, they kept giving a high rating for mortgage investing, and investors kept pouring their money, deeming that the investment was safe because of agency approval.

In agencies' defense, the requirement for having a house was a safety net in a normal situation. But the position wasn't familiar with thousands of investors pouring their money to share for the new gold rush. Besides, corporations tried to draw as many people as possible to buy a house to sell their mortgage paper. To achieve this result, companies offered absurdly low prices to start, but with high-interest rates to draw optimistic people. This action is known as a predatory lending system because it tends to harm the buyer.

Even after nation-wide warning, people still deemed the business is safe, and more people than ever decided to take part in the current action. Experts already drew their money and poured it somewhere else, fearing a burst, but most individuals didn't have the same ability to foresee the market like the expert. Then, the bubble burst. And people that were still pouring the money into the mortgage investment received the most severe impact.

"A financial crisis is a great time for professional investors and a horrible time for average ones."

— Robert Kiyosaki

Government Is the Firefighter

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During that time, the US government tried every way possible to slow down the recession process. The first step by the Federal Reserve was to bail out banks by giving them back-up cash so the hysteric lender wouldn't cause cash shortage. Experts concluded that this action was useful because people began to trust their bank again. So, the bank's essential function wouldn't be disturbed —distributing the government's money to the people.

Based on theories, the economy will recover itself if given enough time. But the time needed to recover from the housing crisis without government intervention is too long. So, congress quickly passed a stimulus to ensure that the wheel of the economy would keep spinning. For an ordinary person, spending too much will result in an empty pocket. But for the government, people spending too little will doom the entire market.

Without purchasing things, there will be no funds for businesses to continue giving incentives for their workers. This condition will result in an unused working population, or economists call it a waste of resources. This condition was like the two sides of a coin. By bailing businesses, corporations shouldn't worry about expanding their business. But this safety may result in a company taking a high-risk step, which will hurt the government in the long run.

A Small Fire Is a Friend, but Massive Fire Is an Enemy

Investing in mortgage business is a wise thing to do, so people's money will keep growing, but individuals should know that there is no easy and quick way to get wealthy. It needs determination and skill to achieve phenomenal profit. So, governments should educate their people and improve their bureaucracy to prevent such things from happening again.

"Sometimes, the aftermath is more devastating than the storm. That is the story of the 2008 financial crisis. It was disastrous at the time, but what has been worse is how long it has lingered."

— Chrysia Freeland

© 2020 Azka Fariz Fadhilah