Causes of the Financial Crisis of 2008-2009

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Causes of The Financial Crisis of 2007-2009

According to our financial textbook “ Financial crises are major disruptions in financial markets characterized by sharp declines in asset prices and firm failures” (Mishkin and Eakins 2012). In August 2007, defaults in mortgage market for subprime borrowers sent a shudder through the financial markets, leading to the worst U.S financial crisis since the Great Depression. Alan Greenspan, chairman of the Fed, described the financial crisis as a “once-in-a-century credit tsunami”. (Mishkin and Eakins 2012). Furthermore, Wall Street firms and commercial banks suffered losses mounting to billions of dollars. Households and businesses found they had to pay higher interest rates on their
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Moreover, many participants contributed to the creation of bad mortgages and the selling of bad securities, feeling secure they would not be held accountable for their actions. The unregulated mortgage originators had no personal responsibility if those contracts failed. And so it was for brokers, realtors, individuals in rating agencies, and other market participants, each maximizing his or her own gain and passing problems on down the line until the system itself collapsed.(Jinkling 2010). In the end, these unregulated originators were concerned on their commission fee, for personal gains, not if any of the loans were going to default.
The Originate to Distribute model plays an essential role, on the unregulated mortgage originators perspective and agenda. Many mortgage brokers and lenders operated under the “originate to distribute” model whereby they originated loans solely for the purpose of selling them. This model allowed them to earn loan origination fees without incurring any type of credit risk. Many times this model, allowed the unregulated originators to take additional fees for collecting loan payments, escrowing and making payments for property taxes and insurance premiums. Additionally, unregulated mortgage originators can charge a fee just by receiving customer inquiries. (Bank Law Committee 2009). According to Mishkin and Eakins, the originate-to-distribute business modal was exposed to principal-agent problems, in
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