The Financial Crisis Of The United States

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.

The responsibilities of the mortgage brokers to the borrowers, lenders, and investors were to promote the subprime mortgages to these groups of people in order for them to take out a loan. Although they did fulfill their responsibilities of promoting and having people sign up for it, they mishandled on how people should be granted for a mortgage loan. These brokers were to desperate about earning huge amount of money due to the expanding market that they ignored the proper precaution that they should have taken when they

After the optimistic forecast from the realstate that the houses value were going to increase, many institutions started to make adjustments to take profit from this trend. In some cases, prime mortgages were allowed for subprime borrowers to take. This might look like a great idea to financial institutions because the house values were rising: if a people (who in the first place couldn’t afford a house) stop paying their mortgages then the bank could sell the house for a value greater than the one at the moment of default. Everything was going well, so how is it that the crisis unfolded? Well, these institutions wanted to make more profit

So what exactly happened to the subprime mortgage market that caused all of this? It actually goes back to 1998 with the Glass-Steagall legislation, which separated regular banks and investment banks was repealed in 1998. This allowed banks, whose deposits were guaranteed by the FDIC to engage in highly risky business because they were guaranteed their deposits up to $250,000 per depositor. Following the dot-com bust in 2000, the Federal Reserve dropped rates to 1 percent and kept them there for an extended period. This drop in rates caused bank managers to have to go after higher-yielding bonds because they could no longer make decent yields off of municipal bonds or treasury bonds. They, like Wall Street, got creative with lending, and went after high-yield mortgage-backed securities like subprime mortgages which were mostly dominated by non-bank originators but because of the demand, many banks and private sector lenders jumped on board to increase profits.

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 mortgage crisis we are experiencing in the United States today is already ranking as among the most serious economic events since the Great Depression of the 1930’s. Hardly a day goes by without a story in the newspaper or on the cable news stations reporting about the increase in the number of foreclosures across the United States. The effects of this crisis have spread across all financial markets, where in the end all of us are paying a price for this home mortgage crisis. When the housing market collapsed, so did the availability of credit which our economy depends upon. The home mortgage crisis, the financial crisis and overall economic crisis all need to address by the

Big banks in the middle 2000s were flourishing of the money made from selling the mortgages to big investors. While this was great when the banks were giving money to people who were reliable and were going to pay their mortgages every month. And when the investors were making such a hefty profit they wanted more. This is when Subprime mortgages were widely used, giving less reliable lower credit scores the opportunity to get homes. The banks knew that these people would not necessarily always be able to pay, which was the one of many mistakes (Crash Course.) The banks learned that while it did sometimes work out, the consequences of giving out too many unreliable mortgages can bring the whole nations economy down for the housing market has always been the pillar of the economy. The greed of the extremely wealthy continued to overpower the common sense of the

Ultimately these lenders mortgages to people with poor credit and a high risk to default. Lenders were willing to make give out these subprime mortgages for countless reasons. Firstly these lenders had large amounts of funds to lend because strong economy leading up to recession. With this abundant capital lenders were willing to make riskier loans to help increase their investment returns. Lenders also thought these subprime mortgages were less risky than usual because rates were low, the economy was healthy and in general individuals were making their payments. The amount of subprime mortgages went from 173 billion in 2001 to 665 billion in 2005. A second reason for why lenders were giving out these subprime loans is due to personal greed and selfishness. Many heads of banks made huge bonuses based on high volumes and fraudulent appraisals. One way these lenders were able to do more volume was through mortgage fraud for profit. Mortgage fraud for profit is a illegal practice committed by industry professional who misrepresent or omit important information about their client’s employment, income, credit or property value with the goal of maximizing their own profits. The FBI found 63,713 cases of mortgage fraud during the year of 2008 alone and 46,717 during the year of 2007. They found out that in many low-credit, low income ZIP codes buyer income was overstated

The problem was everyone who qualified for a mortgage already had one. Lenders knew if they sold a mortgage to a person that defaults the lender gets the house, and houses were always increasing in value in that market, that would be a valuable asset to sell. To keep up with the demand from investors, lenders started selling mortgages to borrowers who wouldn’t have qualified before because of the risk for default. These mortgages are called sub-prime mortgages and lenders started creating tons of them. In the unregulated market, lenders employed predatory tactics to get more borrowers with attractive offers such as no money down, no credit history required, even no proof of income. People never would have qualified before were now buying large houses, and the lenders sold their mortgages to Investment bankers. The investors packed subprime mortgages in with prime mortgages so credit agencies would still give a AAA rating. The rating Agencies who had a conflict of interest by receiving payments from the investment banks, had no liability if their credit ratings were correct or not. They turned a blind eye to the risky CDOs and kept giving AAA ratings. This worked for a while and everyone was happy including the new homeowners. The housing market became hyper inflated with more homeowners than ever. Wall Street continued to sell their CDO’s which were ticking time bombs. The subprime mortgages began

The economy of the United States had been growing for 40 years. Also, the banks were regulated. [1] The congress had passed the Glass-Steagall Act in 1933, which had prohibited the investment banks from investing people's saving in the stock market [1]. In 1999, congress passed the Gramm–Leach–Bliley Act, overhauling the Glass-Steagall Act, letting banks to invest in people's savings [1]. Up to 2008, what banks did was they invested almost $5 Trillion in internet stocks. Furthermore, they lent people Adjusted Rate Mortgages with almost no money down(people loaned 99.3% of the money)to let them buy houses. What this means is they gave people a house for free with low-interest rates. Investment banks offered 150 different ARMs. Adjusted Rate Mortgages having low-interest rates logically leads to

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

They felt that either way they could make a profit; either through the interest on the loan or through the 12% increase in house value that was around in 2006. Had lenders looked at the market with a more realistic expectation, I believe they would have regulated themselves; a perfect example is Wells Fargo. Although they did have subprime loans, they did not engage in the practice with as much abandonment as the rest of the market did. Had lenders saw what was really happening and not what they wanted to see (never ending housing growth translating to unlimited revenue from loans), government would not have had to step in to regulate, nor would they have had to step in to bail them out.

Banks were intelligent enough to realize that the people who were taking and asking for loans were unlikely candidates to pay them back. The banks knew that by giving out these loans that the people would result in two ways. One being to actually pay back the loan with interest to the bank, or two, be forced to foreclose their house. Either way the bank didn’t care because they were making money and getting rich either way. If the people actually paid back their loans, the bank is guaranteed profit through the interest incorporated in the loan and the commission made by the sale. If the people couldn’t pay, there still is a great opportunity for the bank to make profit through selling them to investors. Right before the depression the value of homes was steadily increasing. With a person’s foreclosed house, a bank was able to resell that house and potentially make even more money than if the person has paid back his entire loan with interest. For banks, it was a win-win situation. They saw dollar signs in every possible direction and went for it. They did not care how they were making their money, just as long as there was profit within reach. Money is all that mattered to these banks. (Casil)