The year 2008 was marked by an economic crisis in the United States that had international repercussions. Many events are cited as instigators of the subprime mortgage crisis, however, in the United States, the crisis was caused by three main factors: poor lending practices, the dot-com bubble burst and the after-effects of 9/11. Together, these factors led to the creation of a housing bubble that burst in 2008. A housing bubble is “defined by rapid increases in the valuations of real property until unsustainable levels are reached in relation to incomes and other indicators of affordability” (Bianco, 2008).
1.1 United States Before the Financial Crisis After the dot-com bubble burst in the early 2000’s, the United States’…show more content… Essentially, a subprime loan is one in which “the borrower has blemished credit, usually measured by a FICO credit score” (Wallison, 2010). Moving forward from 2001, the United States saw an increase in subprime borrowing. This resulted in an increase in homeownership rates and demand for housing in the years leading up to 2008. In 2004, the United States peaked when homeownership reached 69.2% (Bianco, 2008). In addition, the rise in demand also fueled an increase in the values of homes (Bianco, 2008). Since interest rates were so low, homeowners also adopted other measures such as refinancing their homes and taking out second mortgages (Bianco, 2008). According to Forbes, subprime mortgages increased to represent approximately one-fifth of the U.S. home loan market in 2006 (Jacobs, 2009). That year, approximately 84% of all subprime loans were from private financial institutions to middle and low-income persons (Denning, 2011).
In 2003, in order to help stimulate the U.S economy, Alan Greenspan, the Federal Reserve Board Chairman suggested, “that homebuyers were wasting money buying fixed rate mortgages instead of adjustable rate mortgages”(Baker, 2009). Fixed rate mortgages did seem attractive at the time as mortgage rates had reached 50 year lows. Most homebuyers could have afforded the ARM during this period; however, most homebuyers did