Housing Market 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.

During the early 2000 's, the United States housing market experienced growth at an unprecedented rate, leading to historical highs in home ownership. This surge in home buying was the result of multiple illusory financial circumstances which reduced the apparent risk of both lending and receiving loans. However, in 2007, when the upward trend in home values could no longer continue and began to reverse itself, homeowners found themselves owing more than the value of their properties, a trend which lent itself to increased defaults and foreclosures, further reducing the value of homes in a vicious, self-perpetuating cycle. The 2008 crash of the near-$7-billion housing industry dragged down the entire U.S. economy, and by extension, the global economy, with it, therefore having a large part in triggering the global recession of 2008-2012.

The housing crisis of the late 2000s rocked the economy and changed the landscape of the real estate business for years to come. Decades of people purchasing houses unfordable houses and properties with lenient loans policies led to a collective housing bubble. When the banking system faltered and the economy wilted, interest rates were raised, mortgages increased, and people lost their jobs amidst the chaos. This all culminated in tens of thousands of American losing their houses to foreclosures and short sales, as they could no longer afford the mortgage payments on their homes. The United States entered a recession and homeownership no longer appeared to be a feasible goal as many questioned whether the country could continue to support a middle-class. Former home owners became renters and in some cases homeless as the American Dream was delayed with no foreseeable return. While the future of the economy looked bleak, conditions gradually improved. American citizens regained their jobs, the United States government bailed out the banking industry, and regulations were put in place to deter such events as the mortgage crash from ever taking place again. The path to homeowner ship has been forever altered, as loans in general are now more difficult to acquire and can be accompanied by a substantial down payment.

The regulation that I have chosen for this paper is amendment in the Regulation X i.e. “Real Estate Settlement Procedures Act” and Regulation Z which is for “Truth in Lending”, for establishing the new disclosure requirements and forms in Regulation Z for the most closed-end consumer credit transactions secured by the real property. This regulation is controlled by the Bureau of Consumer Financial Protection. The role of the Consumer Financial Protection Bureau (CFPB) is to provide consumers information related to the terms of their agreements with financial companies during their application for a mortgage, choosing among credit cards, or using any number of other consumer financial products. The mortgage market is the single largest market for the consumer of financial products and the services in the United States, with approximately $10.4 trillion in loans outstanding. Since last decade, market went through an unprecedented cycle of the expansion and the contraction that was fuelled in the part by securitization of mortgages and the creation of increasingly sophisticated derivative products. This led to the collapse of financial system in 2008 and sparked the most severe recession in United States.

In the 1980s, investments banks such as Goldman Sachs, Merrill Lynch, Bear Stearns, JP Morgan, and Morgan Stanley started selling mortgage bonds. Mortgage bonds were a collection of thousands of home mortgages, purchased from lenders, and their associated income streams (monthly payment). To address the fact that some homeowners often refinance their debt when interest rates are low which prematurely pays off the debt, mortgage bonds were stacked into layers called ‘tranches’. The lowest tranche represented mortgages to be paid off early, and the highest layer was the last mortgages to be paid off.

In the lead up to the current recession, when the real estate market began to fall, there were so many investors shorting stocks and securitized mortgage packages that were already falling, that the market simply fell further. There were no buyers at the bottom, and the professional investors made millions off of the losses of others. Beyond this, there was no real federal regulation for securitized mortgages, since there was no real way to gauge the mathematical risk of any given package. This allowed the investors to take advantage of the system and to short loans on real people’s homes. Once these securities were worthless, many of the homebuyer’s defaulted on their mortgages and were left penniless. No matter from which angle this crisis is looked at, the blame rests squarely with the managers who began the entire cycle, the ones who pursued the securitization of mortgages. Their incompetence not only led to the losses of Americans who have never invested in the stock market, but to losses for their shareholders.

The U.S. economy is currently experiencing its worst crisis since the Great Depression. The crisis started in the home mortgage market, especially the market for so-called “subprime” mortgages, and is now spreading beyond subprime to prime mortgages, commercial real estate, corporate junk bonds, and other forms of debt. Total losses of U.S. banks could reach as high as one-third of the total bank capital. The crisis has led to a sharp reduction in bank lending, which in turn is causing a severe recession in the U.S. economy.

All the economy’s parts seem to be working together for a change: joblessness is under 5% - a 24 year low – yet inflation is holding steady at 3%, a combination that economists thought impossible” (Pooley). This article placed the economy in very favorable position, but the economy collapsed back in 2008 when Wall Street folded. In a video published by Johnathan Jarvis titled “The Cause and Effects of the 2008 Financial Crisis,” the video explains how the economy went from being healthy and vibrant, to desperate and helpless because investors were creating mortgages with people who were not financially stable, and those mortgagors were more than likely struggling to pay their debts prior to attaining a sub-prime mortgage loan. When these sub-prime mortgages defaulted, the house was reposed by the mortgagee and put on the market to sell. When the house went up for sale because of the default, the

It is necessary to first explain what Thomas Sowell an economics scholar says “The cast of characters” (Sowell 2). The nature of the housing market makeup is much more than just a bank issuing loans. The importance is to understand what lies behind the scene and from there comprehend the causes of the housing crisis. The Federal Reserve System in general regulates banks across the county. The Federal Reserve also has power to “take action which affect interest rates and the money supply” (Sowell 2). The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation are “two government-created, but privately owned, profit-making enterprises that buy mortgages from banks” (Sowell 3). The Federal National Mortgage Association is also known as Fannie Mae, and the Federal Home Loan Mortgage Corporation is also known as Freddie Mac. These Associations as stated above buy loans from banks, which ultimately eliminates the banks wait for 30 years of monthly payments. According to book The Housing Boom and Bust “Fannie Mae and Freddie Mac purchased more than one-third of all the mortgages in the nation that were resold by the original lenders.” The U.S. Department of Housing and Urban Development is another major entity in the real estate housing market. The U.S. Department of Housing and Urban Development is also known as (HUD) and “exercises authority over Fannie Mae and Freddie Mac,

Real estate finance in the modern community is changing the perspective of modern lending and purchases. It is a means to contemporary community’s ability to develop a foundation for discussing the nature and means of public spending and purchase. As a self-government sponsored agency, Federal National Mortgage Association (FNMA) also known as Fannie Mae works with the ultimate responsibility of lending and buying secondary mortgages in the market (Oesterle, 2010). It helps in the conservation of interest rates in the real estate business in the contemporary community. There is also the need for focusing on the impacts of the Fannie Mae on real estate finance. The approach of the Fannie Mae helps lenders to use the money gained from the secondary

In order to prevent another housing crisis we must implement programs that would teach housing buyers and potential homeowners how to buy homes wisely because most potential homeowners are unsophisticated and do not know at what rate to buy homes and set personal guidelines for mortgages. The complexity of buying homes not only affected homeowners and home buyers but also confused sophisticated securities investors in that these securities investors sold MBS (Mortgage Backed Securities) at an excessive price range that the MBS should never had been sold at.

The housing market crash, which broke out in the United States in 2007, was caused by high risk subprime mortgages. The subprime mortgage crisis resulted in a sudden reduction in money and credit availability from banks and other lending institutions, which was referred to as a “credit crunch.” The “credit crunch” and its effect spread across the United States and further on to other countries across the world. The “credit crunch” caused a collapse in the housing markets, stock markets and major financial institutions across the globe.

These brokers have neither the credit skills nor the interest to conduct proper payment due of potential homebuyers. Their interest is only in selling the houses as fast as they can. The MBS instruments allowed all financial institutions to transfer the risks to other investors. The dissociation of ownership of assets from risks encouraged poor credit assessment and was fundamental increasing the risks.

In the new system, an investment banker buys the mortgage from the lender, borrowing millions of dollars to buy thousands of mortgages, and every month he gets payments from homeowners for each of the mortgages. The banker then consolidates all the mortgages and splits the final product into three sections: safe, okay, and risky mortgages, which make up a collateralized debt obligation (CDO). As homeowners pay their mortgages, money flows into each of the sections, with the safe filling first and the risky filling last, contributing to their respective names. Credit agencies stamp the top two safer mortgages with a triple A or triple B rating, which are then be sold to investors who want a safe mortgage, while the risky slice is sold to hedge funds who want a risky investment. The bankers make millions, pay back their loans, and investors also make a worthwhile investment. So pleased are the investors, however, that they want more. Unfortunately, back at the beginning of the cycle, the mortgage broker can no longer find qualified mortgagers

One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage