Market Crisis And Its Effects On The Housing Market

On October 3, 2008 President George W. Bush signed the Emergency Economic Stabilization Act of 2008, otherwise known as the “bailout.” The Purpose of this act was defined as to, “Provide authority for the Federal Government to purchase and insure certain types of trouble assets for the purpose of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes” (Emergency Economic Stabilization Act). In my paper I will explain and show the relationship between the Emergency Economic Stabilization Act of 2008 and subprime lending, the collapse of the housing market, bundled mortgage securities, liquidity, and the Government 's efforts to bailout the nation 's banks.

However, these mortgages required no income verification, or resources to pay for the mortgage, as long as they signed the mortgage papers. Fanny Mae and Freddie Mac were the lending arms that provided the money. Both are now government run, but formerly were privately held companies, unlike Ginnie Mae, which is fully backed by the government. When the homeowners could no longer pay their mortgages, the house of cards collapsed. With the lack of education in this country, the middle and lower class were greatly affected by the government’s intervention in Mortgage rates. The subprime mortgage crisis can be blamed for much of this country’s economic problems, but we don’t need to point fingers at what went wrong, we need to address the problems and find solutions.

In 2008 Fannie and Freddie lost a combined $47 billion in their single-family mortgage businesses, forcing the companies to dig deep into their capital reserves. By late summer in 2008—about a year after the start of the housing crisis—Wall Street firms had all but abandoned the U.S. mortgage market, while pension funds and other major investors throughout the world continued to hold large amounts of Fannie and Freddie securities. After the housing market collapsed, Fannie and Freddie needed a $200 billion bailout. If Fannie and Freddie were allowed to fail, experts agreed that the housing market would collapse even further, paralyzing the entire financial system. The Bush administration in September 2008 responded by placing Fannie Mae and Freddie Mac into government conservatorship, where they remain today.

These three agencies were designed to help encourage bank leaning to home buyers. The Federal Housing Administration issued loans that were granted this meant that financial institutes would get their money. Fannie Mae was different from FHA in which they bought loans, this helped lender by freeing up capitol and allowed them to lend more. As Fannie Mae begin to prosper Fannie Mac was establish to create completion between the government lending agencies. When there is completion involved the stress of being out preformed place a burden on people that are working for these lenders. With this type of mentality there was only a matter of time before the lending market would crash. But their can and might be other reason why the housing market crashed. You could look at supply and demand. When there is less inventory prices will rise. If this is true, as home prices rise less buyers will be able to qualify for a mortgage. With less buyers being able to qualify for loans, companies like Fannie Mae and Mac begin to take on toxic loans. Some of these loans included interest only loans and adjustable rate loans with a large principals due at the end of the agree terms. A lot of home buyers could not afford these payment causing homes to go into foreclosure. As the housing market was flooded with foreclosures and rising house prices. The market begin to become unstable, alone with America being at war in two different countries the housing market crashed. The crash sent financial institutes into turmoil, they begin to only lean money well qualified buyers. Some financial institutes merge with others and some even closed, this was due to bad lending practices and regulation. The institutes that survived asked for financial help form the

The Big Short is a movie that discusses the housing market crash in 2008. As you may know, the banks, the mortgage brokers, and the consumers were all affected by this collapse. On each level of the system, there were things that went wrong and that could have been changed that could have prevented the failure of the housing market.

It has been 7 years since the housing bubble burst and the financial systems collapsed back in 2008. Since then, some will say that the housing market, as a majority, has healed and regained footing but is that entirely accurate? It has been an up and down rollercoaster since the collapse of 2008, however the housing market has only started to recover within the past 2 years. “Right now, I would say we are 64% back to normal and a lot of what is driving the housing market’s strength is existing home sales, but prices have also helped push the recovery” (Jed Kolko, Trulia). As stated in the first paper, the housing bubble burst because of the increase in interest rates that put homeownership out of reach for some buyers. This ultimately caused homes to become unaffordable, leading to defaults, foreclosures, and short sales. More so, on December 30, 2008, the home price index reported the largest dip in home prices ever recorded, losing 33% from its 2006 peak to 2012. This financial crisis, unanticipated by most, caused the United States to go into a recession and has been known to be most significant risk to our economy. It was the beginning of last decade, 2000, when real estate prices rose at an unprecedented rate, subsequently leading to the bursting of the housing bubble starting in 2006.

During 2008 many people were unable to pay their mortgages; therefore people went to private banks to loan money for paying their mortgages. Fannie Mae and Freddie Mac provided local banks with federal money to finance home mortgages, but in 2008 many people were unable to pay their mortgages but there was not enough money in local banks to loan out money to the people. In 2008 Fannie Mae and Freddie Mac had owned about U.S.’s $12 trillion in the mortgage market. Unfortunately, if Fannie Mae and Freddie Mac collapsed then mortgages would be hard to obtain and cost more money. Moreover, by demolishing Fannie Mae and Freddie Mac altogether then the U.S. would not have to worry about the cost of mortgages with the potential of it being more expensive and harder to

Because of their size, they were able to buy these from banks to allow banks to have funds available to continue lending (Conners and Gwartney 63). This is where the problem begins for the housing industry. Lenders began writing loans to borrowers without thoroughly checking their credit ratings and accepting a lower down payment because the mortgage would be passed on to Fannie Mae and Freddie Mac for them to hold (Conners and Gwartney 64).

If the loan is made, the borrower sends the required scheduled payments to the servicer, which then remits the payments to the mortgage holder. The characteristics of the borrower and of the mortgage determine the classification of the loan.” (An Overview of the Housing Finance System in the United States Congressional Research Service)

With all that being said, the mortgages that were rated as excellent were actually bad for homebuyers. To the homebuyers’ surprise, the interest rates rose and they could no longer afford to pay their mortgages. This meant that the investors lost their money and subsequently stopped buying these mortgage-backed securities. This sent housing prices falling by thirty percent and the stock market falling by fifty percent, and also led to nine million jobs being lost. Some of companies involved in the mortgages, such as AIG, almost went bankrupt as a result. AIG lost all their money because they insured these bad mortgages and had no money to pay for all the mortgages they insured. These companies did this because they knew the Fed would always have their backs. Because the Fed bailed these businesses out, they were essentially allowed to keep making money off of these bad banking practices. According to Mike Collins, an editor at Forbes Magazine, the actual bailout of these businesses turned out to cost $7.7 trillion, about the same as the US national debt at the time. Without the Fed, the free market would have let these businesses collapse, allowing new and better businesses to take their place, or even better, keep companies from using these bad practices in the first place.

In 1970 the Federal Home Loan Mortgage Corporation was created to expand the secondary market for mortgages. Now known as Freddie Mac, this company is a public government-sponsored enterprise. A government-sponsored enterprise is a financial services corporation created by the United States Congress. Freddie Mac was chartered “with a public mission to stabilize the nation's residential mortgage markets and expand opportunities for homeownership and affordable rental housing.”

The housing market crash of 2007 to 2009 is said to be one of the main reasons for the housing market crash. The crisis occurred when homeowners were not able to make payments on their mortgage. Homeowners were unable to keep up with payments when low introductory rates converted to regular rates. Real estate property began to lose its value, leaving many homeowners with a negative equity. Soon after the housing bubble the government took over (two GSEs) Fannie Mae and Freddie Mac, in order to prevent the financial crisis from getting any worse In the most recent FSOC annual report, the council reported that significant efforts have been made to improve the housing market and reduce taxpayer risks. However, market growth has been slow,

Investment institutions preferred to engage in intricate portfolio investments in subprime markets given the high CDOs’ yields and the absence of regulatory policy. The intricate securitization castle, built on the subprime mortgages market, collapsed when financial institutions started lowering their lending standard in order to sell more debt pools to investment banks. Brokers and traders started to advise their clients against their best interest, in the meantime most bottom-tier credit score mortgage owners stopped paying the lenders and consequently the securities derivatives defaulted. Investors were exposed to huge losses, and the government had to step in to secure the banks operability and prevent a domino effect. Meanwhile top bank

House bubble situation on the real estate market is presented by condition when there are low supply and high demand at the same time, which causes shortage on the market. (Yoshino, Nakamura and Sakai, 2013). Moreover, house price bubble is always associated with speculators who are buying houses with the goal to resell it in the short term. These conditions appeared on London real estate market and caused «Bubble Trouble». This essay will discuss main causes of the bubble, matters of its bursting and danger, connected with bursting.

As securitization seems to be a lucrative way for banks to not only enhance liquidity and diversify risk but also improves their performance considerable incentive problems occurred during the turmoil and among the different parties. Those incentive problems led to information asymmetries and moral hazard among the involved stakeholders .As the Bank/Originator creates reference pool sells them to the bankruptcy remote trust (such as Fannie Mae or Freddie Mac) Bankruptcy remote trust buys reference pool and securitizes it sells them to the capital market where potential investors exists to purchase securities purchase of securities by investors 6 gap between mortgage originators and investors increases, it reduces the incentives for lenders‘ to screen mortgage applicants thoroughly. During the turmoil banks had more and better information about the Mortgage Backed Securities and their performance value in contrast to third parties as they knew more about the mortgage applicant and the underlying mortgage loan .As bank incentives are to issue more mortgage loans and then sell them to bankruptcy remote trusts to securitize them, they did not bear the risk of the mortgage default and this leads to