The financial crisis is not known to occur frequently, but when they do, their effects are detrimental and affect many segments of the market. The Subprime Mortgage Meltdown, occurring in 2007/2008 in the United States was one of the significant financial crisis that has been encountered so far. However, it is notable that the issue would have been prevented if a number of aspects would have been taken into consideration before the crisis. Some of these elements of consideration include the credit ratings being taken seriously, improving the mortgage origination, and improving the risk management and regulations within the United States. The purpose of this essay is to discuss how the aspects mentioned earlier would have led to prevent the subprime mortgage meltdown that happened in the UnitedStates.
Considering the Credit Ratings
The major challenge that led to the crisis is that the credit ratings provided by the rating agencies were not accurate enough and they were not considered before allocating loans to various people and organisation. This led to higher risks of repayment, and hence the crisis occurred. However, if the credit rating companies would have improved their rating systems and these values considered prior to giving credit, then there is a high chance that the crisis would have been prevented.
Improved Mortgage Origination
The challenge was that the mortgages were offered to the potential buyers of houses who had not qualified financially to obtain the same. Also, these homes were presented with higher prices as opposed to their real value. As such, most of the people purchasing houses had mortgages that were over-valued based on their financial circumstances, hence being riskier than they were supposed to be. Due to the failure to consider the background of the people taking the mortgages and understanding about the originators of the same, the financial crisis occurred. However, if the considerations would have been made, then there are chances that the crisis would not have occurred.
Improved Risk Management and Regulation
The risk management engaged in by the authorities in the United States concerning the sophisticated mortgage-related investments was poor, and the execution of the same was also poor. According to Inside The Meltdown, the major financial institutions which were involved in the crisis would not provide consistent estimates of their exposure to any loss. As such, the occurrence of the risks resulted in these institutions lacking funds, hence the crisis. However, if these institutions would have taken the risk management plan properly and valued the securities provided accurately, then there is a possibility the economic crisis would not have occurred.
The purpose of this essay was to discuss how the aspects mentioned earlier would have led to prevent the subprime mortgage meltdown that happened in the United States. Through considering the above-stated points, and others, it is possible to prevent the event of another crisis occurring and hence to ensure that no economic challenges will be faced in the United States.