The Global Financial Crisis of 2008: Can Dodd-Frank Help? The Financial Crisis of 2008 became an

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.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is commonly referred as the Dodd-Frank Act. This act was passed as a response to the Great Recession in order to prevent potential financial debacle in the future. This regulation has a significant impact on American financial services industry by placing major changes on the financial regulation and agencies since the Great Depression. This paper examines the history and impact of Dodd-Frank Act on American financial services industry.

The housing crisis of the late 2000s rocked the economy and changed the landscape of the real estate business for years to come. Decades of people purchasing houses unfordable houses and properties with lenient loans policies led to a collective housing bubble. When the banking system faltered and the economy wilted, interest rates were raised, mortgages increased, and people lost their jobs amidst the chaos. This all culminated in tens of thousands of American losing their houses to foreclosures and short sales, as they could no longer afford the mortgage payments on their homes. The United States entered a recession and homeownership no longer appeared to be a feasible goal as many questioned whether the country could continue to support a middle-class. Former home owners became renters and in some cases homeless as the American Dream was delayed with no foreseeable return. While the future of the economy looked bleak, conditions gradually improved. American citizens regained their jobs, the United States government bailed out the banking industry, and regulations were put in place to deter such events as the mortgage crash from ever taking place again. The path to homeowner ship has been forever altered, as loans in general are now more difficult to acquire and can be accompanied by a substantial down payment.

In 2008, the world experienced a tremendous financial crisis which rooted from the U.S housing market; moreover, it is considered by many economists as one of the worst recession since the Great Depression in 1930s. After posing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It brought governments down, ruined economies, crumble financial corporations and impoverish individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brother and AIG. These collapses not only influence own countries but also international area. Hence, the intervention of governments by changing and

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

EXAMINE THE FACTS. The housing market was making huge financial gains by misleading buyers into buying home that were out of their budget, lenders and originator created unconventional mortgages to people who were at high risk for default.

The Glass Steagall Act was passed on 1933, which is also known as The Banking Act to tighten regulation on the way banks did their business. This act was written as an emergency measure when about 5,000 banks failed during the Great Depression. Banks mostly failed because of the way they would invest with money. The act prohibits banks from investing money on investments that turn out to be risky. Banks could no longer sell securities or bonds. The act also created Federal Deposit Insurance Corporation (FDIC) to protect the deposits of individuals, which is still used to this date. The FDIC in this era insures your deposits in your bank up to $250,000. This gave the public confidence again to deposit their money in the bank. In 1933

The issue with the housing market began around the year 2000. This was also known as the start of the Real Estate Boom. Banks started to handout subprime loans, also known as junk loans with super high interest rates (Lewis). Normally, lower income families would not be able to receive

Once things started to get bad, they got really bad for a lot of families who were given mortgages, who were not properly qualified. There was a major spike in defaults, with

After the market crashed back in September of 2008 housing prices came crashing down as well. The fair value or market value of these mortgages was well below the purchase price for these homes. This left many debtors stuck with mortgages worth more than the value of their homes. Homeowners have no incentive to continue to make large mortgage payments on homes that are valued at less than their current mortgages. This situation has caused many homeowners to default or short-sell their homes in order to get out of these mortgage agreements. In addition, growing unemployment has caused many homeowners with subprime mortgage agreements to default as well.

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.

According to Fligstein, the next step in market formation was crisis. In The Architecture of Markets he states, “market crisis is first observed when incumbent organizations begin to fail.” From 2007-2009, the housing market crashed as the value of homes in the US fell drastically. As a result, many homeowners began defaulting on their mortgages causing huge problems for those involved in the mortgage securitization market. On September 7th, 2008 when the Federal Housing Finance Agency (FHFA) place both Fannie Mae and Freddie Mac under government conservatorship. In addition, the US Department of Treasury agreed to inject up to $100 million into each GSE in order to provide liquidity and to continue purchasing mortgage-backed securities in the market. This would slow the US housing market’s downward spiral. In return, the government would be able to purchase 80% of Fannie Mae and Freddie Mac. The goal of these policy responses was to provide stability to the financial market and support the availability of mortgage finance.

The new lackadaisical lending requirements and low interest rates drove housing prices higher, which only made the mortgage backed securities and CDOs seem like an even better investment. Now consider the housing market which had become a housing bubble, which had now burst, and now people could not pay for their incredibly expensive houses or keep up with their ballooning mortgage payments. Borrowers started defaulting, which put more houses back on the market for sale. But there were not any buyers. Supply was up, demand was down, and home prices started collapsing. As prices fell, some borrowers suddenly had a mortgage for way more than their home was currently worth and some stopped paying. That led to more defaults, pushing prices down further. As this was happening, the big financial institutions stopped buying sub-prime mortgages and sub-prime lenders were getting stuck with bad loans. By 2007, some big lenders had declared bankruptcy. The problems spread to the big investors, who had poured money into the mortgage backed securities and CDOs. They started losing money on their investments. All these of these financial instruments resulted in an incredibly complicated web of assets, liabilities, and risks. So that when things went bad, they went bad for the entire financial system. Some major financial players declared bankruptcy and others were forced into mergers, or needed

In 2008, the market for purchasing and selling houses collapsed. Previous to 2008, speaking specifically between 2000 to 2006, many housing loan companies were offering a low interest rates, which lead to many lenders approving loan applications to individuals who had low or poor credit. When the collapse began, the once-low interest rates increased dramatically, causing many of those individuals were unable to keep up with their payments, which resulted in the foreclosure of their homes. To the extent of this dilemma, many banks went bankrupt, which lead to a number of Wall Street firms in taking a loss.

The reason the company bought these risky loans was because they have a much higher interest rate. Rather than paying 3.53 or 4% interest on a home loan these people were forced to pay almost double that, between 6 and 7%. The conflict of interest arose from the fact that Freddie Mac was the one whom the recipients of these loans had to try to get refinancing from. They did not want to refinance the high interest mortgages into lower interest ones. This caused them to have a conflict of interest. They were not interested in helping people to save their homes because they were making money off the interest. Many people were in need of refinancing, which would effectively pay off the higher interest rate loan and create a new loan with more affordable prices. Freddie Mac refused to help these people out of their mortgages, effectively because they