Global Financial Crisis : Crisis

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

The main cause of the mortgage crisis is the changes in policy for the mortgage industry. In the past, a fixed mortgage was the prime form of lending. All mortgages have the same payments for the mortgage duration and a large down payment was essential. The calculation of the mortgage was based on the initial amount borrowed, and house assessment rather than the rising value of the income and the house over the years.

After the optimistic forecast from the realstate that the houses value were going to increase, many institutions started to make adjustments to take profit from this trend. In some cases, prime mortgages were allowed for subprime borrowers to take. This might look like a great idea to financial institutions because the house values were rising: if a people (who in the first place couldn’t afford a house) stop paying their mortgages then the bank could sell the house for a value greater than the one at the moment of default. Everything was going well, so how is it that the crisis unfolded? Well, these institutions wanted to make more profit

Because of this downfall of the housing market, the U.S. economy fell along with other markets across the country. Homeowners had mortgages higher than what their homes were valued at, the decline in housing prices caused many people to default on their mortgages which caused the values of mortgage backed securities and CDO’s to collapse, leaving banks and their financial institutions holding those securities with a lower value of

Real estate values further rose, luring lenders into taking more risks in their financial transactions. All this was done in the hope of raking in huge sums of dollars since the prices of the mortgages had gone up. Consequently, a large number of people, including those who would not have qualified under normal conditions, were able to secure mortgages. They soon realized that they had blundered but it was too late. Due to increased supply of homes being disposed off by lenders and other financial institutions, the demand went down sharply. There was no more money flowing in the economy as many people now stopped taking the mortgages. This could have resulted into the mortgage crisis.

A few years later the market took a turn for the worse, where interest rates were on the rise, and homes were losing their value quickly. Now borrowers that were in these interest only ARM’s needed to refinance these loans because the rates were going up, to a point where the homeowner was not be able to afford the payment. The Federal Reserve tried to stimulate the economy by lowering interest rates during the recession in early 2001, from over 6% in 2000, to a rate just above 1.25% in 2002. These low rates encouraged many Americans to apply for loans for homes that a few years ago they would have not been able to. To encourage the homeownership boom, the Bush administration urged Fannie Mae and Freddie Mac to allot more money for low-income borrowers so they could buy their own homes. This resulted in the subprime mortgage

The most commonly known sub-prime finance crisis came into illumination when a sudden rise in home foreclosures in 2006 twirled seemingly out of control in 2007, triggering a nationwide economic crisis that went worldwide within the year. The greatest responsibility is pointed at the lenders who created such problems. It was the lenders who, at the end of the day, lend finances to citizens with poor credit and a high risk of failure to pay. When the Feds inundated the markets with growing capital

The main reason for the crisis was a boom and bust in the housing markets at the same time. Home values rose rapidly during the beginning of the 2000’s. Many homeowners used their homes and other assets to withdraw equity to produce add-ons to the house, such as kitchens, decks, or patios. Once the value of the houses went down, they could not pay off this extra debt. Homes were beginning to be valued at less than what the homeowners owed on them. This period was powered by leverage, securitization, and structured finance. Housing was a hot commodity at that time, and Americans were taking out hefty loans in order to pay for them. There was a rise in self-employment at that time, and borrowing money was very relevant at that time. Adjustable rate mortgages, which provided initial interest rates and low monthly payments were the most common form of loans between 2004 and 2008. The banks were not careful in their securitization of loans, and a lot of loans defaulted. The defaults mainly revolved around the failing of the housing market. At the time, there was low requirements for down payments on houses. Lenders were only asking for approximately 3%, today it is up around 10% (Golub). This allowed for more and more people to put a down payment on a house, who would not be capable of paying the banks back. During this time, there was a dramatic increase in sub-prime lending, which means that the people borrowing the money had lowering credit

The lack of money became so bad in the US, UK, and Ireland, that the government had to bail them out. the realization of all this by the public lead to a complete loss of confidence by consumers and investors all around, this lead to less spending and investing. all this lead up to something called a credit crunch. a credit crunch is a sudden shortage of funds for lending. the credit crunch was driven by the bad handling of loans on mortgages that led to a rise in defaults and sub prime mortgages. these mortgages were in america, but the downturn was able to spread throughout the entire globe. people with poor income and poor credit were getting huge loans for mortgages that they werent able to pay back. a cause for this was probably due to the huge incentive for mortgage brokers to sell mortgages at high prices because that's how they got paid, and that played a huge roll in the rise of mortgage defaults. mortgage broker borrowed money to be able to lend mortgage, the lending was not financed out of savings accounts. for many of these mortgages, there was a 1 to 2 year period of low interest rates, at the end of these periods, interest rates rose dramatically, not allowing people to afford the mortgage

As I have touched on earlier, one of the causes of the GFC and why the sub-prime came about is because people were essentially leant money when they could not repay it. Too many people were given keys to these houses without any real capacity to service their loans. Obviously, this was not the only reason for the meltdown but it certainly played a very big part in the crisis.

The problem was everyone who qualified for a mortgage already had one. Lenders knew if they sold a mortgage to a person that defaults the lender gets the house, and houses were always increasing in value in that market, that would be a valuable asset to sell. To keep up with the demand from investors, lenders started selling mortgages to borrowers who wouldn’t have qualified before because of the risk for default. These mortgages are called sub-prime mortgages and lenders started creating tons of them. In the unregulated market, lenders employed predatory tactics to get more borrowers with attractive offers such as no money down, no credit history required, even no proof of income. People never would have qualified before were now buying large houses, and the lenders sold their mortgages to Investment bankers. The investors packed subprime mortgages in with prime mortgages so credit agencies would still give a AAA rating. The rating Agencies who had a conflict of interest by receiving payments from the investment banks, had no liability if their credit ratings were correct or not. They turned a blind eye to the risky CDOs and kept giving AAA ratings. This worked for a while and everyone was happy including the new homeowners. The housing market became hyper inflated with more homeowners than ever. Wall Street continued to sell their CDO’s which were ticking time bombs. The subprime mortgages began

The Global Financial Crisis, also known as The Great Recession, broke out in the United States of America in the middle of 2007 and continued on until 2008. There were many factors that contributed to the cause of The Global Financial Crisis and many effects that emerged, because the impact it had on the financial system. The Global Financial Crisis started because of house market crash in 2007. There were many factors that contributed to the housing market crash in 2007. These factors included: subprime mortgages, the housing bubble, and government policies and regulations. The factors were a result of poor financial investments and high risk gambling, which slumped down interest rates and price of many assets. Government policies and regulations were made in order to attempt to solve the crises that emerged; instead the government policies made backfired and escalated the problem even further.

It is referred to as the credit crunch and it is believed to have begun in July 2007. Banks were deregulated which meant that they were free to decide things which were usually kept restricted by the government in order to protect the people. This led to many banks coming together to form massive financial institutions. These banks would sell mortgage loans to people who couldn’t even afford them meaning that everyone in America could have these massive houses, this caused a serious dilution of the American housing market. People were not able to pay back their mortgages, resulting in the banks accumulating dead assets. This meant that on paper they still had the houses and the money

The 2008 financial crisis can be traced back to two factor, sub-prime mortgages and debt. Traditionally, it was considered difficult to get a mortgage if you had bad credit or did not have a steady form of income. Lenders did not want to take the risk that you might default on the loan. In the 2000s, investors in the U.S. and abroad looking for a low risk, high return investment started putting their money at the U.S. housing market. The thinking behind this was they could get a better return from the interest rates home owners paid on mortgages, than they could by investing in things like treasury bonds, which were paying extremely low interest. The global investors did not want to buy just individual mortgages. Instead, they bought

The Financial Crisis of originated from the US housing sector in 2001-02, gradually increased and eventually brought the entire world economy in its grip. It is characterized by liquidity in the global credit and housing market, triggered by the failure of mortgage companies, investment banks, and government institutions which had heavily invested in subprime loans. Though the crisis started in 2005-06, but it become more visible during 2007-08, when many of the Wall Street firms collapsed.