The Mortgage Crisis From A Critical Thinking Approach(Work In Progress)

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Step 1 – RESEARCH AND DEFINE

As sourced from the COLL 148 textbook, step 1 entails that the problem solver ascertains a large sense of familiarization with the situation and its possible causes through the use of credible research. A key in this step is to define the issue appropriately, so as not to solve an unrelated problem. Once a good deal of effort has been asserted in defining the problem via research, the next step will involve assimilating the problem’s cause or causes (“Step 2”). (Brown,2007)

Problem Summary
The “Mortgage Crisis” (a recent term coined by the media in response to the hopelessness felt) is not only affecting American homeowners, but homeowners abroad internationally. Initially, and as one of the catalysts for this crisis, the inventory of homes was in excess. Once the housing bubble burst, this entire excess inventory swiftly declined in value(Bush,2008). A predominant amount of these mortgages were under the grip of Adjustable Rate Mortgages (ARMs). Due to poor lending and borrowing practices coupled with the unrelenting terms of most ARMs, an inability to refinance mortgages occurred and the terms of the ARMs forced homeowners to pay considerably more on their mortgages. As homes began to lose their value, homeowners had much less equity to work with and much less of a monthly budget(due to ARMs terms), resulting in delinquent payments and eventually foreclosures. This also led to a negative effect on the economy as new home construction was put to a standstill. In terms of the financial market, cash flow from mortgage payments to the banks was halted resulting in devastating losses to the banks(Olefson,2009). This eventually led to the cessation of many well known banking institutions; Washington Mutual, Wachovia and Lehman brothers for example. An enormous liquidity crisis then occurred paving the way for extreme interest rates on new loans and even preventing many loans from being issued(Strachan,2009). This...