Subprime Mortgage Crisis - Article Example

The subprime mortgage crisis in the US was because of events and conditions that were characterized by mortgage foreclosures and delinquencies. These caused a decline in the value of securities that were backed by these mortgages (Bajaj & Story, The New York Times). This was due to an initial offer of attractive rates on returns of mortgage-backed securities and the high-interest rates on mortgages. The fault of these subprime mortgages was that they were over-reliant on low credit quality, which had a high probability of failing through default on repayments (Bajaj & Story, The New York Times).

This eventually led to the subprime mortgage crisis because it could not support itself without adequate funds, which were expected to come from loan repayments. Steps that can be taken to avoid another subprime mortgage crisis in the future of the US include the formulation of policies to guide lending practices, which were the major contributor to the crisis. Legislations should be made to protect consumers, enact executive pay and provide an expanded regulation of the shadow banking system and derivatives (Bajaj & Story, The New York Times).

Financial cushions and capital requirements for banks should also be reviewed in order to ensure that only those institutions that can shore up their clients’ liabilities are allowed to operate. Effective reform will require an expanded federal deposit insurance corporation to include non-banking institutions (Bajaj & Story, The New York Times). Measures should be put in place to regulate financial institutions to ensure that clients do not withstand the worst of unwise and detrimental financial decisions by lending institutions.