Mortgage Backed Securities : Cause And Effect

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.

I plan to explain the actual causes that led to the Subprime Mortgage Crisis, as well as, the role shadow banking played in the whole matter before and after the total collapse of the entire financial system. Moreover, I will be discussing five economic concept issues that were included in this subprime crisis, along

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.

The recent mortgage crisis in the US was unprecedented. It led to a massive clampdown of financial institutions, occasioning one of the worst financial melt-downs the US has ever faced (Jaffe, 2008). Quite naturally, it would be necessary to examine the cause of the crisis in order to draft prophylactic measures that would prevent the same financial disaster in the future. This paper will discuss the events that led to the mortgage crisis.

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 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

From the U.S. Housing Bubble to the greed and deception of investors, the United States economy was beginning to fall during this time period. The Community Reinvestment Act was showing its effects nearly thirty years prior to the bursting bubble. Being forced to meet quotas and avoid penalties, banks were almost forced to sell mortgages to anyone, even if they could not afford them. They believed that the only way to grow was to discontinue the verification of things such as income, in order to gain more customers in the mortgage market. Fannie Mae and Freddie Mac were created to provide liquidity, stability, and affordability to the mortgage market. In reality, they just created the early steps of securitization, increasing the greed and deception of

In 2008, one of the biggest financial recessions of our time occurred. The blame that should be placed on the unexpected crash of the housing market should come from the shady business strategies used by banks and investment agencies, which caused millions of everyday people to lose their jobs and homes. The role of subprime mortgages, CDO’s, and illicit ratings caused the biggest financial crisis since the Great Depression. The culmination of these things led to the downfall of the economy and start of a recession.

Now these financial markets have allowed many to become successful and live the “American Dream,” but have also caused many to suffer and lose everything. Back in 2007, the United States’ economy experienced a large financial crisis that almost paralleled the financial crisis during the Great Depression. Large financial institutions suffered a great deal and the stock market plummeted worldwide. The housing market took a huge hit as well, causing many foreclosures and evictions. This crisis stemmed from a major default in the subprime mortgage market. The bad credit records should have given some forewarning to the looming crisis, but the financial innovation for these mortgages gave investors a chance to succeed in the market. So as a large volume of cash flowed into the United States, the subprime mortgage market took off and became a trillion dollar market by 2007 (Mishkin 208). With prices rising in the housing market, subprime borrowers could simply refinance their houses by taking out even larger loans as homes appreciated in value. These borrowers were also unlikely to default because the houses could be sold off to pay back the loan. This benefited investors since the securities backed by cash flows from subprime mortgages had high returns. And this continued growth of the subprime mortgage market further increased the demand for houses and continued to fuel the increase in housing prices.

The “Great Recession,” the name given to the financial crisis that occurred in the United States between 2007 and 2009, saw the biggest contraction of the US economy since World War II (Amadeo). Real GDP fell as sharply as a -6.4% annual rates and unemployment rose above ten percent in the aftermath of the crisis. The primary culprit of the Great Recession was the US housing market. New financial instruments that allowed for lending to subprime customers, along with deregulation of the banking industry, and asymmetric information produced by credit agencies all played significant roles in these happenings. Moral hazard on behalf of financial product providers ultimately led to the asymmetric information that allowed the housing market to collapse.

Mortgage-backed securities were bonds that were secured by home and other real estate loans. They were created when a number of these loans, usually with similar characteristics, were pooled together. As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities, which derive their value from mortgage payments and housing prices, greatly increased (Subprime mortgage crisis). Pools of loans were sold to federal government agencies like Ginnie Mae or a government sponsored-enterprise such as Fannie Mae or Freddie Mac. Securitization was the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. A typical example of securitization

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

Ben Bernanke, the chairman of the Federal Reserve, insists that “The 2008 economic crisis could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income, and jobs.” The 2008 economic crisis is known as the worst financial crisis since the Great Depression of the 1930s. Most economists believe that the crux of the economic crisis is the subprime mortgage crisis, which happens mainly because of the faulty monetary policy. Consequently, the paper aims to analyze the impact of monetary policy on the 2008 economic crisis. The essay will briefly introduce the economic crisis, explain the subprime mortgage crisis, and talk about the US government’s response to the trouble. In addition,

The 21st century mortgage crisis is certainly a key factor to the current financial catastrophe. There are multiple events that contributed to the downward spiral of the mortgage business. The crisis can be directly linked to the overzealous dreams of home ownership to the manipulation and failure of capitalism. What started out as mortgage bankers’ relaxed and deregulated approach to funding unqualified lenders has turned into an unprecedented mortgage crisis which has greatly impacted the global markets.

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