The Financial Crisis Of The Housing Bubble

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.

One of the factors that led to the mortgage crisis was the housing bubble. It started in 2001 and climaxed in 2005. A housing bubble is characterized by rapid increase in the value of real estate properties to an extent that

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.

Between 2004 and 2006, the Federal Reserve decided to increase the interest rate at which it would lend money to banks. The effects of this led to higher interest rates passed on to consumers by the banks. Though this is only part of the issue, it contributed to the housing bubble collapse. The economic effects of what occurred were not fully realized until August of 2008.When the housing market crashed; it had tremendously adverse effects on the US as well as the World economy (Bajaj).Why did raising interest so slightly affect so many people? The simple answer is that a lot of people were living beyond their means. Banks and subprime lenders were lending money to people who realistically could not pay the loans back. President Calvin Coolidge said, “There is no dignity quite so impressive, and no one independence quite so important, as living within your means”.

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.

The Recession of 2008 was caused by two major faults: the use of subprime lending and changes in banking culture leaning towards self interest within the banking industry.

The financial crisis of 2008 did not arise by chance. The meltdown was precipitated by systematic striping away of the New Deal era policies of bank regulation. Most notable of these deregulatory acts was that of the Gramm-Leach-Bliley Act of 1999. This bill repealed the legislation which held commercial banks and investment banks separate. As the beginning of the 21 century approached many bankers clamored for an end to the policy of the “firewall” between Investment and commercial banks. Gramm-Leach-Bliley Act of 1999, sought to create more competition in the financial services industry. The policy, however, lead to the conglomeration of many corporate entities as banks had the capital to invest (in the form of consumer deposits) in a

The real estate market in 2008 is notorious for sparking one of the largest housing bubbles in history. In order to understand the housing market during the bubble you need to recognize the events that caused it. This was simply an economical failure from the hands of some of the most well-known financial institutions and the Government. Going back to 1997 to 2006, if you take a look at the Case-Shiller Home Price Index (the leading indicator for the US housing market residential prices), you will discover a rise in nominal home prices of 188%. Although there is not a lot of consensus that uncovers what sparked the housing bubble, countless people have spoken their opinion in regards to this: misguided monetary policy; government policies pushing home ownership, consumer speculation of rising home prices, and lower housing supply. These examples can’t fully explain the crash, but they can provide insight as to what may have happened or at least contributed to it. This article goes into depth on some of the explanations to the housing bubble and how the burst of it eventually led to the credit crisis which sparked the entire recession in 2008.

This was a big problem because the housing boom became an economic bubble. An Economic bubble is when a demand gets very high is the price inflates to the point where it is not sustainable and tends to burst as it gets too big. This is exactly what had happened. People wanted to buy expensive houses that they couldn’t afford. The money came from other countries so that getting good credit was easy and with that credit, they took out loans to buy the houses. This is called Sub-prime Mortgages. There are three types of mortgages. A Prime mortgage, which is issued to a person who has a solid credit history and a high likelihood of repayment, A Alternative A-Paper mortgage, which is a mortgage issued to a person with good credit, but without

But what caused this Housing market threat? First, The Subprime mortgages, It starts off with greedy mortgage dealers who set the terms that are unfair to the people who desire to obtain the mortgage loan. These people were often families who were not even qualified for an ordinary home loan. Even though, these subprime mortgages offered low interest rate in the beginning, later on that would increase to double digit rates in later years. This was called teasers. The mortgage

Investors who had invested in Mortgage back securities were baffled. The houses as a collateral were worthless and AIG – biggest insurance provider for credit default swaps – went bankrupt. Investors started selling their CDOs but there were no buyers. These billions worth of CDOs and mortgage back securities turned into worthless piece of papers. By December 2007 economy was in recession. Banks decreased credit lines, business couldn’t get loans to function, therefore, workers were laid off which further deepened the

Americans took on large amounts of debt believing that they could eventually pay it off. Investors borrowed money in order to buy stocks. This idea of leverage was critical to the excessive amount of debt that Americans began to rack up. One of the biggest causes of the financial crisis of 2008 lies within a term called deregulation. For the longest time, the financial industry was kept in check by strict regulations from the government. Banks were small and high-risk actions were not common. In the 1980s, however, the financial sector began to grow. Banks began to go public, thus receiving lots of stockholder money. The Reagan Administration started a period of financial deregulation that lasted 30 years. This deregulation allowed banks to make risky investments with the money given to them by depositors. This continued through several presidencies. By the late 1990s, a few firms made up the entire financial sector. These few firms were given way too much power. A bubble began to develop in housing markets because of financial deregulation increasing the speculation of housing. As a result of this, many risky mortgages were sold. In less than 15 years, there was a tremendous increase in lending mortgages to people who really couldn’t afford

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.

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

The Federal Reserve allowed the housing bubble to occur and this promoted low interest rates, relaxed and accessible credit, limited regulation, and lethal mortgages; as a result, this manifested into a global imbalance and securitization. The subprime mortgages growth attracted investors and the loans were packaged as AAA bonds. “The