Answered: What happened to credit standards(down…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

ChapterST5: The Great Recession Of 2008-2009: Causes And Response

Section: Chapter Questions

Problem 2CQ

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What happened to credit standards(down payment, mortgage loan relative to value, and creditworthiness of the buyer between 1995 and 2005? How did this influence the housing pricing bubble and later the default and foreclosure rates?

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From the year 1995 to 2005, there were many changes in the real estate market. This led to a change in credit standards. The minimum down payment mortgage loan relative to the house value was lowered tremendously. The rules of the creditworthiness of a borrower were also relaxed. All these were meant to induce more people to buy houses. The credit standards changed as the supply of houses was becoming less than the demand. This led to a hike in the prices of houses.

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