A Short Note On The Housing Market Collapse

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VI. The Housing Market Collapse The housing market began its collapse on itself with its peak in 2004, and suddenly there was a rapid decrease in the amount of people willing to purchase a home. During the end of 2005 the housing market began to decline, and in 2006 real estate properties dropped by nearly 40 percent to the year prior. At this point the federal funds rate had risen to 5.25%, resulting in many subprime borrowers having the inability to pay off their loans. This resulted in more people defaulting on mortgages investment banks had purchased. When a borrower defaults on their loan, the investment bank is left with the property to sell instead of the monthly mortgage payments. As the housing market declined, these properties…show more content…
In 2007 investment banks acquired more than one trillion dollars in investments filled with these suffering subprime mortgages. During the first quarter alone in 2007, twenty five subprime mortgage lenders were forced into bankruptcy. Towards the end of 2007, it became clear that our financial market would was not able to solve this subprime mortgage crisis on their own. With failed attempts entering the international banking market, the Fed responded by significantly decreasing the federal funds rate again. The Fed decreased the rate like they had in response to the DotCom Bust and 9/11 in an effort to stimulate the economy once again. By 2008, the federal funds rate had been lowered to 1%, but the reduction of this rate was not enough to prevent the financial crisis. VII. Financial Firm Failures Throughout 2008 major financial corporations became insolvent. The first institution to be eliminated was Countrywide Financial Corp. Not only were they the first major corporation to go, but they were America’s largest mortgage lender. In January of 2008, they were bought out by Bank of America, for fractions of Countrywide’s market value just a few months prior. The next bankruptcy came from Bear Stearns, who had acquired a large amount of mortgaged backed securities. The bankruptcy filing was followed by JPMorgan Chase purchasing Bear Sterns at roughly $1.2 billion, with Bear Stearns having assets valued at up to $30
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