Housing Market Crash Essay

However, hope might be on the horizon for the victims of the mortgage disaster of 2007/2008. Home buyers who were foreclosed upon years ago, or boomerang buyers, are beginning to be eligible to buy homes again. While some feel hope after feeling bamboozled by lenders and Fannie Mae and Freddie Mac, some feel anxious and fearful of the thought of buying again. Yet there are lessons that have been learned by the mortgage meltdown. Fannie Mae and Freddie Mac provided a lesson for the

In order to encourage people to buy more houses and boost the real estate market, the homebuilders, financial lenders, and the government created new financial instruments of calculation that were not researched properly. Lenders sold mortgages to investors that allowed the risk of default to be covered even though the mortgage was in a financial stretch for the borrower. Borrowers did not read the fine print and made decisions that they could not afford. The major banks Federal and otherwise, kept the interest rates low causing investors to take risks to get high returns in the short term, disregarding the long terms security of the whole process.

During this time period, homeownership typically required a 20 percent down payment (Melicher & Norton, 2014, 168). Lending institutions were very careful about whom they lent money to, and credit standards were high (Melicher & Norton, 2014, 168). Melicher & Norton (2014) called this the “save now, spend later” philosophy, and it would change in the coming years (p. 168).

EXAMINE THE FACTS. The housing market was making huge financial gains by misleading buyers into buying home that were out of their budget, lenders and originator created unconventional mortgages to people who were at high risk for default.

The beginning of the crisis: From the early to the mid-2000’s, high-risk mortgages became available from lenders who funded mortgages by repackaging them into pools that were sold to investors. New financial products were used to apportion these risks, with private-label mortgage-backed securities providing most of the funding of subprime mortgages. The less

Low interest rates and the ease of borrowing money are two primary causes of the current recession. In 2007, 37% of the total home mortgage loans were considered a “liar loan” because the mortgage lender did not evaluate income or assests (Russo, Mitschow, & Schinski, 2015). The Federal Government sought to encourage home loaners to loan to risky homebuyers and they kept low interest rates for far too long. During this time mortgage brokers began selling home mortgage loans rather than a commercial banking system. They were not subject to the scrutinized federal regulations, and lent money to many individuals who were unable to afford the homes that they were buying. Many people overestimate their ability to pay debt, resulting in them buying expensive homes because they were approved regardless of their credit or income. The crisis occurred when homes values dropped due to the ability for individuals to buy expensive homes, which resulted in people owing more on their homes than the value of the house. It was nearly impossible for people to make a profit when selling their homes, so many homeowner’s felt that it would be best to default on their loans as they were losing money paying for a home with less value than the actual loan. The more foreclosures there was, the more home values diminished and causing more and more

The problem to be investigated is the ethics and effects of subprime loans on the financial institutions, borrowers and stakeholders. The subprime market was created to provide borrowers with a FICO score below 570 access to home loans. Inopportunely these loans were a major financial risk as most of the borrowers did not have the long-term income to pay for the high interest rate loans. (Jennings, 2012)

As American as apple pie, home ownership is a quintessential part of many American’s dream. Making this dream a reality requires hard work, perseverance, and an understanding of the housing market and loan options. It also requires a confidence in the economy and job market that many people justifiably do not have after a devastating housing crash. However, as our nation recovers from this crisis, we look ahead to new opportunities and safe loan standards for home ownership. “Like a boomerang,” a Sarasota Herald Tribune article describes “…recession-battered [boomerang buyers] are reentering the home market in droves after years of renting, nursing their credit and saving enough to buy again” (Salman). Both boomerang buyers and first time

Between 2004 and 2006, the Federal Reserve Board raised interest rates from 1% and capping out at to 5.25%. Even with interest rates on the rise, the housing bubble continued to grow. Why did the bubble continue to grow when typically interest rates increase homeownerships typically declines as well? Economists look at the lending practices before and after the bubble. Prior to the bubble standard typically included, “documentation of credit histories of prospective borrowers, their current income and assets, evidence of job stability and pay, and related factors that in theory help a lender assess a potential borrower’s ability to pay for a mortgage.” During the 2000’s lending practices eased with the government continuing to push their policy on continuing to grow homeownership numbers. To continue homeownership lenders developed new innovative loans such as, “piggy back loans (80/20), adjustable rate mortgages, stated income loans, negative amortization mortgages, and multi-layered risked.” These loans gave homeowners many options as with piggy back loans, allowed consumers to purchase a home without having to put down a down payment, however they would have a first and second mortgage. Many consumers also opted for adjustable rate mortgages such as interest only loans. These loans allowed the consumer to purchase a home that would most likely be out of their monetary range, with

One of the biggest lessons that could be learned through the mortgage meltdown recovery involves the ease at which a homebuyer could borrow money. Mortgage programs were available for almost anyone who was interested in purchasing a house – even if they legitimately were unable to afford it. Creative marketers continued to bend mortgage underwriting guidelines to increase volume and profit. Investors on Wall Street have voracious appetites for steady returns on investments and the mortgage securitization market was no exception. Business executives continued to make it easier to borrow money, thus increasing their returns as these income streams were bundled and sold again and again on the secondary market. No one noticed the volatility that was created by continuing down the path of easy money. As the market collapsed, there was no small correction to the rules and regulations that would save the inevitable implosion. Any and all remaining mortgage lenders made it virtually impossible to borrow money for several years. Without access to mortgage money, houses would cease to sell. The lesson that was learned in this situation was that the rules, regulations, and underwriting guidelines used to lend money had to

A generation ago, lenders held onto mortgage loans until they were repaid, and retained a relationship with the borrower and an interest in their financial wellbeing. That changed considerably at the start of the 21st century. The modern, high-risk mortgage market gained its first head of steam in the 1990s, and its origin lies primarily in a string of deregulatory policy decisions over the last three decades. High-risk lending passed through two boom periods, the first one in the late 1990’s as well as the larger, second one in the 2000’s. The first boom was marked by a surge in subprime refinance lending. The second included both subprime home purchase loans and refinance loans and they grew rapidly after 2001 (Marcuse, 2009, p.351). Together a new class of alternative or

To really be able to fix the housing market, we have to look at how it got so bad to begin with. Banks were giving loans out to people who couldn’t afford to repay them. That was, what I see, as the most detrimental situation regarding the housing market. Are the banks only to blame? Absolutely not. Those people who took those loans with little thought of repercussions also caused this mess. We shouldn’t be borrowing money so loosely and the banks should not have made it so easy.

In the beginning days of the 21st century, the United States experience an increase in the price of real estate. The causes of the housing bubble were many and, even after it collapse in 2007, the causes for it creation are still under scrutiny. As parties are still blaming each other, the losing party in this crisis is the general public as they have been made responsible for it aftermath through the collectivization of the financial cost. Inquiries into the causes of the housing bubble and its eventual collapse has brought to light an ever increasing number of players responsible for its creation, some going back t the 1970s.

As home prices continued to rise, lenders thought the borrowers would just default on the mortgage and then the lenders would just be able to sell the house for more cash. While prices and risks were rising, investors were notified by credit rating agencies that mortgage backed securities were safe investments by giving them AAA rating (Naude 3). These investors were told one thing and market investments were not showing high returns. Lenders started to create more and more investments because investors wanted to buy more securities, but in order to create more investments, lenders needed more mortgages (Erkens, Hung, & Matos 392). A way to create more mortgages was to widen their customer market. Lenders created less strict rules and regulations

The real estate and mortgage meltdown several years ago taught Americans many financial lessons. The first lesson learned after the meltdown is to not allow home buyers to borrow loans worth more than the value of their home. The second lesson is to not allow home buyers to qualify for larger loans based on a lower monthly payment obtained by the use of a variable interest rate loan. The third lesson is to require home buyers to have at least a five percent down payment on their home. The fourth lesson is to not let money be so easily available to people unlikely to pay back the loan.