The Collapse Of The Subprime Mortgage Market Causing A Global Financial 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.

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.

Rep. Barney Frank (D-MA) explains the old system of lending and the new securitization process. Matt Demon narrates how the home buyers repaid their loans to lenders, and consequently, the lenders sold the loans to the investment banks which combined the mortgage loans with other credit loans creating a collateral debt obligation a complex derivative. The collateral debt obligation sold to investors who paid the rating agency to evaluate the CDO's. The home buyers were now paying investors through this

The financial crisis of 2007-2009 resulted from a variety of external factors and market incentives, in combination with the housing price bubble in the United States. When high levels of bank and consumer leverage appeared, rising consumption caused increasingly risky lending, shown in the laxity in the standard of securities ' screening and riskier mortgages. As a consequence, the high default rate of these risky subprime mortgages incurred the burst of the housing bubble and increased defaults. Finally, liquidity rapidly shrank in the United States, giving rise to the financial crisis which later spread worldwide (Thakor, 2015). However, in the beginning of the era in which this chain of events took place, deregulation was widely practiced, as the regulations and restrictions of the economic and business markets were regarded as barriers to further development (Orhangazi, 2014). Expanded deregulation primarily influenced the factors leading to the crisis. The aim of this paper is to discuss whether or not deregulation was the main underlying reason for the 2007/08 financial crisis. I will argue that deregulation was the underlying cause due to the fact that the most important origins of the crisis — the explosion of financial innovation, leverage, securitisation, shadow banking and human greed — were based on deregulation. My argument is presented in three stages. The first section examines deregulation policies which resulted in the expansion of financial innovation and

The mortgage and financial collapse of the United States economy had a very devastating impact on thousands upon thousands of Americans. I count myself as one who also had been affected as well.

If [a homeowner’s] mortgage is securitized, the original loan provider may “sell, assign, and transfer the mortgage loan to a ‘sponsor,’ which is typically a financial services company or a mortgage loan conduit or aggregator.” The sponsor then repeats this process, selling, assigning, and transferring the mortgage to a “depositor,” who sells, assigns, and transfers the mortgage to a trustee, “which will hold the loans in trust for the benefit of the certificate holders.” The trustee finally issues a mortgage backed security (MBS) with [the homeowner] and multiple other homeowners' mortgages, subject to a pooling and servicing agreement (PSA). A pooling and servicing agreement is a trust agreement “entered into by the depositor, the trustee,

Freddie Mac Introduction The year 2007-2008 witnessed one of the most devastating economic crisis along history. Many financial institutions suffered during the crisis and even some of them completely disappeared. This paper will focus on the mortgage market meltdown, while highlighting the major downturn witnessed by Freddie Mac. Historical Background The mortgage lending industry is one of the most crucial industries in the US.

During the mortgage meltdown of the 2000s, I lived in an area of Metro Detroit know for their financial instability. Our local high school was millions of dollars in debt, and it was not unlikely to see many houses in my neighborhood go into foreclosure throughout the year. It was truly an epidemic that was taking hold of every family in the community, no matter the strength of their financial background. I also saw how models like this could be found across the entire country, and how it was becoming a destructive environment to be a part of. This environment was unsettling to me as a child, and was the fundamental reason that I have consciously formed structured financial habits as I ease into adult life. I refused to assimilate to a culture that showed debt, such as student loans or mortgages, as the only way to live in society. In this, I am driven to graduate college debt-free; this task will be far from easy, but with determination and consistency, I will succeed. I know that what the nation needs to pull itself into celebrated economic security is through embedded financial literacy and complete cultural transformation.

From the data discovered based on the increase of technology, it provided an understanding of the traditional process of being granted or providing loans and mortgages. Banks traditionally grant loans to individuals or businesses that meet specific credit requirements and would receive periodic payments. This process continues until the loan is fully paid off. Due to the increase in technology, banks were able to lower their costs for transactions by securitizing loans electronically. This innovation allowed them to bundle up all small loans into a standard debt security, which then could be bought and sold in the financial market. This led to a structured credit product offering that generated large cash flows from a collection of underlying assets with certain risk management. Investors had the opportunity to pick and choose what they wanted to purchase depending on their likes and

Demand became so aggressive that too many securitizers and lenders believed they were able to create and sell mortgage backed securities so quickly that they never put their shareholders’ capital at risk and hence did not have the incentive to evaluate the credit quality of what they were selling. Pressures on lenders to supply more “paper” collapsed subprime underwriting standards from 2005 forward. Uncritical acceptance of credit ratings by purchasers of these toxic assets has led to huge losses. It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivates markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of

Before the pre-2008 economic recession era, people were ignorant of what was bound to happen. Life was a party. Incomes were steadily rising: most people in every financial class had a credit card, a family to support, and an opportunity to do so by moving into the biggest house they could find. Mortgage loans were given out to anybody with a heartbeat and credit rating, this is called a subprime mortgage. If somebody wanted a new home they could get it, no matter if they could afford it or not. However, when interest rates started to rise people were not able to pay their mortgages and their homes were foreclosed upon. Homeowners who were not careful — or just plain unlucky — when choosing what mortgage was suitable for their income were either left homeless or stuck living paycheck to paycheck. The capitalism party was over. Everyone stopped buying what they once thought they could afford just so they could maintain proper housing, in turn a recession began. So was the 2008 financial crisis caused by the homeowners? Homeowners in the United States — for the most part — are not gluttons for bigger and better homes they can not afford, it was a case of misinformation perpetrated by investment banks and mortgage lenders in the pursuit of more money. When higher interest rates began to kick in misinformed homeowners could not pay their steep mortgages anymore, resulting in multitudes of mortgage defaults. Mortgage defaults and the housing bubble did play a significant role in

The mortgage crisis and attendant real estate collapse of the late 2000’s was disastrous for numerous homebuyers and ushered in a time of economic hardship for many in the United States. This crisis laid bare problematic industry practices, some predatory and others merely short-sighted, as well as buyer behaviors that were both financially unviable and psychologically damaging. In spite of the havoc wreaked by the real estate collapse, we can learn valuable lessons by examining the buyer behaviors and presumptions of that time and adapting our current attitudes and behaviors accordingly. Improved consumer behaviors are not the only positive results of the real estate collapse. Meaningful regulatory changes, designed to protect buyers, have been effected within the lending industry as a direct result of the crisis and its fallout. The lessons we learned and the changes to lending practice combine to potentially serve as a great benefit to real estate consumers in today’s market, both those new to the housing market as well as those “boomerang buyers” who are returning to the market after having experienced the mortgage crisis firsthand.

The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play

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

In relation to the increase in house’s price, the rise of financial agreements such as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) encouraged investors to invest in the U.S housing market (Krugman, 2009). When housing price declined in the U.S, many financial institutions that borrowed and invested in subprime mortgage reported losses. In addition, the fall of housing price resulted in default and foreclosure and that began to exhaust consumer’s wealth and