The Real Estate Bubble Crisis

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From the late 1990’s to mid-2000’s the United States experienced an unprecedented run up of real estate prices across the country that reached a peaked in 2006, in some areas up to an eighty percent increase. After the increase in prices, there was a sudden collapse of real estate prices in 2008, brought on by a surge in foreclosures, and an increasing inventory of housing.1 Foreclosure increases came from an unprecedented rise in mortgages called, subprime mortgages. These risky subprime mortgages, and the cottage industry within the financial sector that profited from them, created an overly leveraged and over exposed finance industry that created a massive recession when the bubble popped. In this essay, we will look into the many …show more content…

Foreign investors starving for fixed income securities that also had returns better than government securities, decided to invest in mortgage back securities provided by Fannie Mae and Freddie Mac. In order to take advantage of the savings glut Wall Street firms began to package many of these sub-prime mortgages together and create what was known as a mortgage backed security.1 A mortgage backed security, was an asset backed security that was secured by a collection of upwards a several hundred mortgages. The issue was the mortgage back securities provided by Fannie, Freddie, and investment banks were given good ratings by rating agencies such as Standard and Poor’s and Moody’s, even though these assets were toxic. They gave the mortgage back securities good ratings, because their risk assessment models solely used previous housing data, and did not include any possibility of a fall in housing prices.3 As a result, overseas investors believed they were getting secure assets with above average returns, but instead they were getting very toxic assets instead. So the interest in these mortgage back securities continued the flood of savings, continuing the suppression of interest rates and maintained the status quo.2 Banks lent out these sub-prime mortgages at a prolific rate because even if the borrower foreclosed, banks were still able to make a profit, as they resold a higher priced house. Another form of easy credit came from the historically low short term rates

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