Introduction:
The Big Short was a comedy-drama film that was conducted by Adam McKay and written by Charles Randolph and Adam McKay. The Big Short movie is based on a book from 2010 written by Michael Lewis. This film had a limited release starting December 11, 2015, and then fully released on December 23, 2015. The Big Short is a 2015 Oscar-winning film. The film explains the financial crisis that happened from 2007 to 2008. This financial crisis was a huge issue while everything was crashing down because of home mortgages with people purchasing homes just as an investment. The Big Short really focuses on the people who were predicting the crisis before anything really even happened. Watching this movie was very eye-opening for me and expanded my knowledge on home mortgages and what could go wrong in the future that is sometimes out of your hand you can’t control it.
Backstory:
The financial crisis started in February of 2007 when the housing industry asset “bubble burst” was caused by the subprime mortgage crisis. With years past the increase in home values and low mortgage rates, people were basically buying houses to buy them and not using the home as a place to live, but more as an investment. In March 2007 the stock markets rebounded. The Feds decided to ignore the “warning signs” and they were more worried about inflation. The home sales decreased from 6.48 million sold in 2006 to 6.18 million in 2007. Later on, in 2007 the Feds decided to lower rates to 4.75% and foreclosure rates doubled at the beginning of 2008 when the financial crisis began. The financial crisis that happened in 2007 through 2008 led to millions in the United State being unemployed and many without homes. This crisis spread to the worldwide financial and economic crisis as well. The main players in the movie The Big Short are individuals, mortgage lenders, big banks, collateralized debt obligations (CDOs), rating agencies, and investors. These main players were the main focus of the movie because it was a large part of the financial crisis that started in 2007.
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Who is to blame?
Individuals, some people want to blame the homeowners for the financial crisis because people were buying homes not even to live just as an investment. Mortgage lenders get blamed for this because people are claiming someone had to know that this could possibly happen. Banks are also getting blamed for the financial crisis as well because they were accepting applications for second homes for investment when they could have not accepted so many applications and maybe the financial crisis wouldn’t have happened.
Mortgage Loan:
A mortgage is a loan that a bank or mortgage lender approves of the finance to assist you when you can purchase a house either a primary residence, a secondary residence, or an investment residence. A home mortgage is one of the many forms of debt and most mortgages have lower interest rates than other loans. A home mortgage can have a fixed or floating interest rate depending on what the individual would like.
A subprime mortgage is a mortgage loan made for an individual with a very low credit score and limited income to get a conventional mortgage loan. Commonly, subprime borrowers are likely to be unable to complete the payment on their mortgages. A mortgage-backed security (MBS) is a package of mortgages that are sold and traded similarly to a bond. How does the mortgage industry work? There are many steps in the process of the mortgage industry: a range of lenders, lead generation services, working together with a broker, loan application processing, competition, and assisting the borrower.
What are CDOs?
CDOs represent collateralized debt obligations and are a “financial tool that many banks use for individual loans into a product sold to investors on the aftermarket.” This consists of loans such as credit card debt, mortgages, auto loans, and corporate debt. Why are they called “collateralized because the repayments of the loans are collateral that gives the CDOs their own value.” There is also an alternate name that some people use known as Collateralized Loan Obligations (CLOs). A credit default swap is an insurance program that pays off if the CDO defaults. This is how The Big Short people “bet against the real estate market.”
Definitions:
What are regulators? A regulator is someone or something that regulates something. Banking is the business of accepting lending or investment, deposits of money from people repayable on demand or withdrawable. Banking is one of the most important things worldwide. Rating agencies are a company that provides investors with an estimate of an investment’s risk. A mortgage broker is an intermediary who gets mortgage borrowers and mortgage lenders together to meet and discuss further information. Homeowners are people that own a home or homes. Speculators can be a person who invests in stocks or property and possibly make a profit.
In 1977 Congress passed the Community Reinvestment Act (CRA) which “requires the federal banking regulators to encourage financial institutions to help meet the credit needs of many communities that are low and moderate income.” There are only three federal banking agencies that are accountable for CRA such as “The Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB), and Office of the Comptroller of the Currency (OCC).” The purpose of the Community Reinvestment Act (CRA) is to exemplify that the bank is working to meet the credit needs of different incomes and people.
Ethics and Law:
The concepts of ethics and law can be different in many ways. Law refers to a systematic body of rules that governs the entire society and the actions of its individual people. What is law? Law is a set of rules and regulations that people have to abide by and it is governed by the government. Law is established with the purpose to sustain social order and peace in the environment and supplying protection to citizens. Ethics is a branch of moral philosophy that explains to people basic human conduct. What is ethics? Ethics is a set of guidelines that have to be followed properly. With ethics, there is no punishment for violating the guidelines while violating the law there is punishment such as imprisonment and/or a fine. Ethics is made to assist people to make a decision about what is right and what is wrong. Law and Ethics are very different; one consists of what a person must do while the other one consists of what a person should do.
Conclusion:
The financial crisis started in 2007 throughout 2008 because people were purchasing homes as an investment while there were low mortgage rates. People were going insane purchasing secondary homes for investment and then the housing industry asset bubble burst. Unfortunately, the bubble burst and many financial organizations were left to deal with trillions of dollars of investments. The financial crisis affected the entire world leaving people without homes or jobs. Many of the people that purchased homes during this time found out that they owe more on their mortgages than their home was really worth. The federal reserves were getting warning signs and hints that the financial crash could potentially happen but they just kept ignoring the signals. In 2009, the economy was starting to get back to “normal”. This movie was very interesting. I enjoy watching movies that are educational and that can allow me to expand my knowledge of business topics. I can definitely say that I have learned a lot from watching this movie and researching other information as well.
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