Why Are People Homeless?
Have you ever economically thought about why people are homeless? Since the recession of 2008 about 700,000 men, women, and children are homeless on any given night. There are many factors that contributed to this crisis, such as hedge funds, irrational exuberances, subprime mortgage, interest only loans, MBS, and drops in GDP, just to name a few. Many people brought into these securities and when they default the economy took lost. This resulted in many people ended up losing their houses and jobs.
Hedge funds are private owned companies that combine investors’ dollars and reinvest them into different types of financial instruments. Their goal is to do better than the stock market. Because hedge funds were not regulated, use of derivatives helped cause the financial crisis of 2008.
They bought mortgage backed securities. When housing prices started to decline in 2006, the underlying mortgages defaulted. Hedge fund managers thought they were protected from that risk because they owned CDS (Credit Default Swaps). CDS is a contract that insures against default from MBS. However, the number of mortgage defaults overwhelmed issuers and caused the insurance to collapse.
A subprime mortgage is given to borrowers whose credit history is not good enough to afford a regular mortgage. Subprime mortgages offer interest only loans. Interest only loan rates are generally fixed for the first one, three or five years. This allows borrowers to afford a larger home for their families. Most borrowers assume they will refinance before the principal needs to be repaid, and the monthly payment increases. When they couldn't afford the increased payment, many defaulted on the mortgage, and foreclosed on the home.
This irrational exuberance causes investors to overlook deteriorating economic fundamentals in the pursuit of ever-higher returns.
The danger of irrational exuberance is that it doesn't last. The frenzy of greed then turns to the panic of fear, which drives investors to sell at any cost. This collapse in stock market prices can spread to the entire economy.
Mortgage backed securities (MBS) are investments. Their value is secured. When you buy a MBS, you aren't buying the actual mortgage. You are buying a promise to be paid the return that the bundle will receive. A MBS is a derivative, because its value is derived from the underlying asset. Securities are a form of ownership that can be easily traded on a secondary market. Securities allow anyone to own the underlying asset without taking possession. The secondary market allows banks to sell mortgages.
Mortgage backed securities were created to allow banks to sell off mortgages, and lend to new borrowers. This removed the importance for good lending practices. Because banks got paid for making the loan, and didn't get hurt if the borrower did not pay off the loan. Banks weren't as concerned about the credit of the borrower.
Mortgage backed securities allowed financial institutions other than banks to enter the mortgage business. Before MBSs, only banks had large enough deposits to make long-term loans. The invention of MBSs meant that lenders got their cash back right away from investors on the secondary market. Mortgage lenders sprang up everywhere, and they also weren't careful about who they lent to. This created additional competition for traditional banks, which had to lower their standards to keep the loan volume up.
MBSs were not regulated. Mortgage backed securities allowed more people to buy homes. Many less careful banks and mortgage companies made loans with no money down, allowing people to get into mortgages they couldn't afford. The lenders didn't care, because they knew they could sell the loans, and not pay the consequences when and if the borrowers defaulted. When investors all flock to a particular asset such as real estate, the prices of assets become over-inflated due to excess demand. Since many investors, pension funds, and financial institutions owned mortgage-backed securities; everyone took losses, creating the 2008 financial crisis.
Recessions are caused by a decline in Gross Domestic Product (GDP). GDP measures how fast the economy is growing compared to the previous quarter. If it is growing, so will businesses, jobs, and personal income. If it's slowing down, then businesses will hold off investing in new purchases and hiring new employees. When the economy is expanding, the GDP growth rate is positive. When we’re in a recession the economy contrast, then GDP growth rate is negative. This happened in 2008 and 2009, when the GDP growth rate was negative for four quarters in a row.
The decline of manufacturing orders, falling housing prices and sales, and a drop in business investments, caused the GDP rate begin negative for four consecutive quarters. The result of this slowdown was fallen employment, and rising unemployment. This increases layoffs and job loss.
According to jobs report the current unemployment rate is 8.3% and the number of unemployed begin 12.8 million. From March to December of 2007 the unemployment rate went from 4.4% which is 1.5 million to 5% which is 7.6 million, despite the slowing job growth. In 2008 the unemployment rate rose from 4.9% to 7.2%. Due to the huge job loss in 2009 the unemployment rose from 7.6% to 10%. The unemployment dropped in 2010 from 9.7% to 9.5%. And in 2011 the unemployment rate dropped from 9% to 8.5% leaving 13.1 million people unemployed.
As the number of job loss increased so did the number of people becoming homeless. Those who were once a part of the working middle class are now a part of the lower class. 46.2 million people are living underneath the poverty line, that’s the highest in fifty-two years. African Americans make up the largest number with 27%, followed by Hispanics at 25%, Asians with 12.1%, and whites making up 9.9%.
Today’s generations are affected the most. Young people from ages fifteen to twenty-four have no work experience, low education levels, and are living under the poverty line. Entry level jobs have been replaced as minimum wage jobs. This makes it makes it harder for young people to find a job, especially those who have dropped out of school at a young age. A college degree is no longer guaranteed against destitution. Many young people are moving in with family members and friends to save money. This also causes them to under the poverty line.
Since the recession families have become financially distressed. Assistance programs for the less fortune have cut and eligibility rules have been stricter. About one billion people are hungry every day. Although food stamps are now accepted at almost all places, they are now that much harder to get. 900,000 to 49.9 million people are now uninsured, because the qualifications have changed. These things are forcing families to live in shelters or out on the streets. This generation is the first that’s worse off than their parents were.
Jobs give people the opportunity to have all the things that they are now forced to live without, because of the decline in GDP. The financial crisis of 2008 caused 13.2 million people to become homeless, one billion to become hungry, and left 12.8 million jobless in America.
