The Subprime Mortgage Crisis Devastated From The Global Financial Market

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.

During the early 2000 's, the United States housing market experienced growth at an unprecedented rate, leading to historical highs in home ownership. This surge in home buying was the result of multiple illusory financial circumstances which reduced the apparent risk of both lending and receiving loans. However, in 2007, when the upward trend in home values could no longer continue and began to reverse itself, homeowners found themselves owing more than the value of their properties, a trend which lent itself to increased defaults and foreclosures, further reducing the value of homes in a vicious, self-perpetuating cycle. The 2008 crash of the near-$7-billion housing industry dragged down the entire U.S. economy, and by extension, the global economy, with it, therefore having a large part in triggering the global recession of 2008-2012.

The world’s financial system was almost brought down in 2008 by the collapse of Lehman Brothers that was a major international investment bank at that time. The government sponsored these banks’ bailouts that were funded by tax money in order to restore the industry. Before the crisis, banks were lending irresponsible mortgages to subprime borrowers who had poor credit histories. These mortgages were purchased by banks and packaged into low-risk securities known as collateralized debt obligations (CDOs). CDOs were divided into tranches by its default risk. The ratings of those risks were determined by rating agencies such as Moody’s and Standard & Poor’s. However, those agencies were paid by banks and created an environment in which agencies were being generous to ratings since banks were their major clients.

The financial crisis from2007 to 2008 is considered the worst financial crisis since the Great Depression of the 1920s and destroyed the U.S. economy severely. It led the housing prices fell 31.8%, the unemployment rate rose a peak of 10% in the United States. Especially the subprime market, began defaulting on their mortgage. Housing industry had collapsed. This crisis was not an accident, it caused by varies of factors. The unregulated securitization system, the US government deregulation, poor monetary policies, the irresponsibility of 3 rating agencies, the massed shadow banking system and so on. From my view, the unregulated private label mortgages securitization is the main contribute factor which led the global financial crisis in 2008.

Even though Countrywide stopped offering subprime loans 4 months ago, the company is still in the forefront of the subprime mortgage lending and foreclosure crisis.

During 2007 through 2010 there existed what we commonly refer to as the subprime mortgage crisis. Through deduction of readings by those considered esteemed in the realm of finance - such as Ben Bernanke - the crisis arose out of an earlier expansion of mortgage credit. This included extending mortgages to borrowers who previously would have had difficulty getting mortgages; this both contributed to and was facilitated by rapidly rising home prices. Pre-subprime mortgages, those looking to buy homes found it difficult to obtain mortgages if they had below average credit histories, provided small down payments or sought high-payment loans without the collateral, income, and/or credit history to match with their mortgage request. Indeed some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA), otherwise, those facing limited credit options, rented. Because of these processes, home ownership fluctuated around 65 percent, mortgage foreclosure rates were low, and home construction and house prices mainly reflected swings in mortgage interest rates and income.

The financial crisis that happened during 2007-09 was considered the worst financial crisis in the world since the great depression in the 1930s. It leads to a series of banking failures and also prolonged recession, which have affected millions of Americans and paralyzed the whole financial system. Although it was happened a long time ago, the side effects are still having implications for the economy now. This has become an enormously common topic among economists, hence it plays an extremely important role in the economy. There are many questions that were asked about the financial crisis, one of the most common question that dragged attention was ’’How did the government (Federal Reserve) contributed to the financial crisis?’’

The mortgage and financial collapse of the United States economy had a very devastating impact on thousands upon thousands of Americans. I count myself as one who also had been affected as well.

Many factors such as the U.S. Sub-prime mortgage crisis, credit crunch, decline in investments, higher unemployment rates, terror attacks, and the housing bubble caused the great recession of 2007 to 2009. The resulting loss of wealth led to severe cutbacks in consumer spending. This loss, combined with the craziness of the financial market led to the collapse and business investments. As consumer spending and business investments went down massive job loss followed. The largest indicator of economic activity is the real gross domestic indicator (GDP). The recession had a loss of business and consumer confidence. Spending declined and millions of jobs were lost. This resulted in a downward shift in the GDP, and a severe increase in unemployment

The 2008 mortgage crisis was preceded by a series of missteps and unfortunate circumstances culminating in a perfect storm that triggered the worst financial meltdown since the great depression. After experiencing an 87% increase in average home prices between January 2002 and mid –2006, the mortgage market steadily declined and the boom began to subside. Unfortunately, the boom soon became a bust and by the end of 2008, housing prices were about 25% below the peak level achieved in 2006. As a result liquidity and capital disappeared from the market. (Jeune Renay. Lessons Learned In The Aftermath Of The Mortgage Crisis). A period of unusually high home foreclosure rates that caused an impact on the economy is still some years later an unfolding story in many American cities. It was not just a subprime event, but a much broader phenomenon that was among the most notable economic events of recent years. This was the result of irresponsible buyers who borrowed much more than they could afford. Regardless of the cause, foreclosure was difficult for the individuals who experienced it. They simply were buyers who had not done their homework. Today is safe to say that home buying isn’t for everyone. Despite all that has been said and done about this crisis, one realizes a need to understand and discuss the lessons learned as well as determine silver linings drawn from the event which will more fully illustrate how buyers are benefiting today. The following paragraphs will explain

Beside internal factors, we examine the external factors, Opportunities and Threats, of KBRA. The incumbent credit raters’ fail in the financial crisis gave an opportunity for new rating agencies like KBRA. After the financial crisis, the government and the investors realized the importance of appropriate corporate credit rating. The government might tend to subsidize newly-established rating organizations and create new regulations for credit rating in order to eliminate the oligopoly of three big financial agencies. KBRA benefits from such environment. Also, it is easier for small or new rating agencies like KBRA to apply a new revenue model under revised regulations.

Rating agencies also had a strong motivation to compete for market share by catering to their clients. In 2000, Moody’s became an independent, publicly owned firm after being released by its parent company, Dun & Bradstreet. This placed even more pressure on Moody’s managers to increase revenues and improve their shareholder’s returns. (Lawrence, p. 456) From this point on, we begin to see the credit rating agencies drastically underestimate the risks of mortgage-backed securities in a selfish attempt to further their own bottom lines. The birth of structured finance came from new techniques of quantitative analysis used by Wall Street investment banks, and suddenly, Moody’s was not just evaluating corporate, municipal, state and federal government bonds. Structured finance consisted of combining income-producing assets—everything from conventional corporate bonds to credit card debt, home mortgages, franchise payments, and auto loans—into pools and selling shares in the pool to investors. (Lawrence, p. 456)

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

Notably, the credit rating agencies were not run or monitored by government, they were private companies that were obligated to analyze how likely debtors are to pay off their loans. During the time, there were multiple companies that were responsible for rating debt; however, the most popular ones were the Standard and Poor’s (S&P) and Moody’s Corp. The typical scale that indicated the safest rates was labeled AAA, and the unsafe ones were labeled usually Bs, Cs, or Ds depending on the company (Tom, 2016). The development of more complex mortgages rose the demand for rating agencies, since there were too many debtors for banks to assess them on their own. According to Amanda J. Bahena, “The volume of requests for rating structured finance products such as mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) increased drastically between 2004 and 2006, as did the complexity of the rated products. In hindsight, it appears that the structured finance hype caused the CRAs to lose their grip on reality, (Bahena, 2010). Since the companies had no one to look over them, they were free of consequences even when they did not rate their cases correctly. Overall, they were open to outside influence and brought on destruction to the housing marking and the financial sectors worldwide. “The CRAs were criticized for worsening the