Bank of America and the Mortgage Crisis
explanatory Essay
983 words
Bank of America and the Mortgage Crisis
Sharply rising mortgage foreclosure rates during the economic recession between 2007 and 2009 have drawn a significant amount of attention from scholars and policy makers. There has been an abundance of research probing factors, particularly sub-prime lending and neighborhood characteristics, contributing to foreclosures (Li). The present paper, investigated causes of the mortgage disaster with relevance to Bank of America. Bank of America is one of the major financial institutions affected and is losing money in the industry.
It is hypothesized that the bank and other financial institutions are still struggling in the industry, due to several reasons. The research question in this paper is: What led to the mortgage down fall since the recent recession that occurred in 2008.
In a research article by (Zhu, 2013), there are several causes of the sub-prime mortgage crisis. The author lists the following five contributing factors: The Federal Reserve abets the bubble, mortgage companies make loans perfunctorily, carefully packaged investment bank, hedge funds seeking income, Credit Company’s default assessment. It is hypothesized that because the Federal Reserve were afraid that the bursting of the internet bubble and other crisis events might lead the US economy into a prolonged recession, hence carried out a series of continued policies of interest rate cutting (Wolf and Ian, 2006). In low interest rate environment, the high price of homes promoted the prosperity of the real estate industry (Zhu, 2013). As the necessary supportive facilities, the mortgage companies and commercial banks increased in a geometrical progression, (Zhu, 2013). Premised by this situation, people who are livi...
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...the AAA grade while only 7% are given BBB or other lower grades (Zhu, 2013). This illustrates that credit rating companies are not independent, objective, prudent and accurate in performance of their duties (Zhu, 2013). Misled by the overly optimistic rating results, many investment institutions such as funds and commercial banks invest heavily in sub-prime mortgage bonds and its derivatives, which make the cirsis scale extend and result more serious (Zhu, 2013).
References
Zhu, Y. (2013, May 30). The causes and corresponding strategy of sub-prime mortgage crisis. Retrieved from http://maxwellsci.com/print/rjaset/v5-5592-5597.pdf
Li, Y. (2011, December). Geography of opportunity and residential mortgage foreclosure: A spatial analysis of a U.S. housing market. Retrieved from http://www.jurareview.ro/2011_3_2/a_2011_3_2_5_li.pdf
In this essay, the author
- Explains that the federal reserve abets the bubble, mortgage companies make loans perfunctorily, carefully packaged investment bank, hedge funds seeking income, and credit company’s default assessment.
- Explains that freddie mac and fannie mae's primary business accounts for 70% of the us sub-prime mortgage market.
- Explains that credit rating companies are not independent, objective, prudent, and accurate in performing their duties.
- Explains that sharply rising mortgage foreclosure rates during the economic recession have drawn a significant amount of attention from scholars and policy makers. the present paper investigated causes of the mortgage disaster with relevance to bank of america.
- Cites zhu, y, li, and li on the causes and corresponding strategy of sub-prime mortgage crisis.
Related
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- Sub-Prime Mortgages and the Death of the American Dreamexplanatory essaySub-Prime Mortgage: The Snowball Effect Intermediate Macroeconomics Sub-prime mortgages were a lucrative new market idea, pushed by the government, executed by the lending institutions, in order to provide everyone the American Dream. During the expanding economy, this dream became a reality—untested and unchecked—as low interest rates fueled the desire of investors to make dreams come true! Ultimately, the vicissitudes of the economy turned downward and the snowball effect began while financial sectors and investors scrambled to catch the falling knife. While history is being written this very day and hindsight is 20/20, we can reflect on the ideologies and policies that brought forth the worst economic downturn since the Great Depression.
In this essay, the author
- Explains that sub-prime mortgages were a lucrative new market idea, pushed by the government, executed by lending institutions, in order to provide everyone the american dream.
- Explains that the sub-prime mortgage market was profitable because of low interest rates, low unemployment, and high demand for housing. the market assumed an annual foreclosure rate of 8% with the average loss being 30%.
- Explains how the sub-prime market was flooded with capital, fueled by a spike in foreclosures, and increased supply, which drove down the values of homes.
- Explains that the sub-prime mess was only a symptom of the global problems yet to come as investors from all around the world were buying up these securities. rating agencies worked closely with investors to ensure these mortgages and bonds were receiving "aaa" rates.
- Explains that americans now have less discretionary assets than they did before, and credit tightened as interest rates went up and originators and the second mortgage industry had trouble selling off these liabilities.
- Explains that the global economy is spiraling downward into a recession, with the credit markets frozen, everyone is being forced to sell securities to raise capital in order to meet obligations.
- Opines that there are many uncertainties as to what is in store for our economy. the government passed a $700 billion bailout package for the lending institutions.
- Opines that an expansionary fiscal policy will funnel money into the economy, but will it change the 21st century’s mindset which has enjoyed vast spending towards a propensity to save?
- Cites petroff, eric, and amerman, daniel. the subprime crisis is just beginning.
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In this essay, the author
- Opines that the united states government must take decisive action to give those with impending foreclosures the ability to keep their homes.
- Explains that misplaced confidence in the bright future of home prices and the attempts of lenders to profit in every way were major causes of the current crisis.
- Analyzes how a national goal of increased home ownership augmented these causes, encouraging financial institutions to make irrational loans and encouraging people to purchase homes they could not afford.
- Opines that the next step in finding a solution is defining what an effective solution ought to accomplish. government must institute new policies that prevent unsustainable housing bubbles from arising in the future.
- Opines that home ownership is a good concept with numerous benefits, but it is not financially wise for every household. this situation is an opportunity for real reform in the housing market.
- Explains that bailouts are short-term fixes that bring many problems of their own and should be used only to prevent the collapse of the entire economic system.
- Argues that government should take well-planned and efficient action to prevent bailouts as short-term fixes.
- Opines that improved financial advice should go hand-in-hand with a better financial information infrastructure. dr. robert shiller suggests many of these reforms in his book the subprime solution.
- Argues that government action to prevent collapse of essential institutions will help restore confidence, and reducing the risks taken by lenders with stricter regulations. real estate agents and financial planners would better help all members of society when paid by hourly fees.
- Explains inflation indexing, home-price futures, continuous-workout mortgages and home equity insurance.
- Opines that these innovations will stabilize home markets and give homeowners ability and incentive to avoid foreclosure. these policies would provide consumers with a drastically improved understanding of mortgages and the risks involved with them.
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In this essay, the author
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- Explains that title ii of the u.s. home loan bank act authorized the establishment of an insurance fund for mortgages on homes built under federal supervision or purchased after federal appraisal.
- Explains that the insured mortgage was admirably suited to the needs of national mortgage lenders, including life insurance companies, commercial banks, and savings banks
- Argues that a combination of financing incentives will encourage cost reductions on the part of house and apartment builders.
- Explains that a subsidized interest rate is another alternative to financing housing for middle-income families.
- Explains that president barack obama and key advisers introduced a series of regulatory proposals in june 2009. the proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the federal reserve to safely wind-down systemically important institutions.
- Explains that amortization reduces the debt's sensitivity to interest rate risk, as compared to debt with the same maturity and coupon rate.
1783 wordsRead More - The Housing Boomexplanatory essayIn the early 2000’s the housing market boomed, real estate was a hot investment and everyone was looking to buy a home. However not everyone can afford a home and a majority of people were forced to take out a mortgage to purchase real estate. During the housing boom banks were supplying subprime loans and upping the risk in the real estate market. These loans were not only risky but irresponsible on the part of the banks’ lending them, and although individuals receiving the loans thought they were being helped at the time, these loans were a major reason why so many people their homes, almost crippling toe U.S economy as a whole.
In this essay, the author
- Explains that during the housing boom, banks were supplying subprime loans and upping the risk in the real estate market. these loans were risky and irresponsible.
- Explains how the real estate market and mortgages banks issue is an investment. prime borrowers were able to borrow money at a stable, fairly low interest rate.
- Explains that the banks' lending these subprime loans knew the risk that went along with each loan and each borrower. they packaged loans up and sold them to large investment firms as mortgage backed securities.
- Opines that the housing crisis shows that everyone takes a risk when it comes to investing and everyone may pay the consequences of risking too much.
- Explains that the 600 billion dollar subprime loan market crashed, and the risk banks took by lending these loans did not pay off.
674 wordsRead More - The Great Recessionanalytical essayIt can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market.
In this essay, the author
- Explains that every few years, countries experience an economic decline which is commonly referred to as a recession. the paper will cover the issues which led to the recession, discuss the strategies taken by the government and federal reserve to alleviate the crisis, and look at the future outlook of the u.s.
- Argues that the economic hardships of the great recession began when interest rates were lowered by the federal reserve. the bubble forced banks to give out homes loans with unreasonably high risk rates.
- Explains how the federal reserve stepped in and bailed out the banks in an attempt to smooth over the financial struggles of the economy.
- Analyzes how the u.s. government and federal reserve stabilized the economy and prevented a second great depression, but left tens of millions of americans out of work, under-employed or earning significantly less.
- Analyzes how the nation's economic struggles during the great recession led to the current macroeconomic situation that deals with unemployment.
- Cites mcgraw-hill/irvin koba (2012) and love, n. s., & mattern, m.
670 wordsRead More - Financial Crisis Essayopinionated essayBy irresponsibly lending mortgages to “subprime buyers” for the past three years, banks had created a potentially huge problem if homeowners started defaulting on their mortgages. Banks sold these mortgages, along with their risk of default, to bigger banks that pooled mortgages around America into one big investment. Pooling mortgages was designed to reduce the risk of an single individual defaulting on their mortgage. A majority of people were able to pay their mortgages back, only a small percentage would default, making pooled mortgages a profitable investment. Mortgages can only be pooled if their risks are interpreted as uncorrelated. Big banks claimed that the United States housing market is uncorrelated and housing values would fluctuate independent one another in different housing markets. Large banks went onto sell pooled mortgage debts to inve...
In this essay, the author
- Explains that the 2008 financial crisis started long before the market crash of 2008.
- Explains that by lending mortgages to "subprime buyers," banks created a potentially huge problem if homeowners started defaulting on their mortgage.
- Explains that market consistency encourages investors to make risky higher yielding decisions in the long run, but if interest rates are low and unstable, investors will invest in long-term stable investments.
- Analyzes how the federal reserve's lax enforcement of laws and regulations on banks impacted banks' ability to make risky decisions.
- Explains that the 2008 financial crisis was caused by a series of failures by the government regulate united states financial institutions.
- Opines that the federal reserve should have bailed out lehman brothers before other banks would become subject to the same fate.
- Opines that the federal reserve's lax regulations were one of the biggest mistakes leading up to the 2008 market crash.
1076 wordsRead More - Proposed Solutions to the Foreclosure Crisis in Americaanalytical essayThe first major problem that led to the foreclosure crisis has to do with the availability of loans for housing. While laws such as the 1982 Alternative Mortgage Transitions Parity Act (AMTPA) and the CRA...
In this essay, the author
- Argues that the current state of the housing market and the influx in foreclosures have had a dire impact on the american economy since the beginning of 2007. the best approach is for the government to back out, stop the destructive and often contradictory policies that have been put into place, and allow free enterprise and private sector to revive the economy.
- Explains that the first major problem that led to the foreclosure crisis is the availability of loans for housing. freddie mac and fannie mae are similar, chartered by congress, but run against the traditional economic grain.
- Argues that the federal reserve is a bank and government institution at the same time. the government controls the sails and freddie mac and fannie mae is the rudder.
- Argues that encouraging leasing as a new trend will help fix the economic problems related to foreclosure.
- Argues that government meddling has persisted since the great depression, and only by fully removing it can we hope to resolve not only the current crisis, but future problems as well.
- Opines that in order to solve the crisis, the attitude of the government towards banks must change.
- Opines that the recovery phase is the simplest part of the whole process, but it must be given time to work.
1749 wordsRead More - The American Foreclosure Crisisopinionated essayForeclosure is a dreadful aspect of home-owning. The American foreclosure crisis, and its subsequent economic recession, was caused by lateral misguidance on part of private banks, the federal government, and by the millions of people who purchased their homes on credit. Over 900,000 foreclosures have occurred in California alone, making its foreclosure rate the largest and most formidable; as a result of the housing downturn, private banks like JP Morgan and Wells Fargo succumbed to bankruptcy, as the toxic assets they possessed lie curdled and menacing. Stocks tumbled as confidence in our financial system crashed; millions of people lost their jobs in the course of one petrifying year. The lending process was halted, effectively stalling the crediting and lending system that has shaped American consumerism habits since the 1950s.
In this essay, the author
- Explains that the american foreclosure crisis and its subsequent economic recession was caused by lateral misguidance on part of private banks, the federal government, and millions of people who purchased their homes on credit.
- Opines that the process that led to the foreclosure crisis, the sickly details of the economic crash, and the terms of our recovery have been mulled over repeatedly.
- Proposes a solution for the consumer finance protection agency (cfpa), which would be separate from the u.s. chamber of commerce.
- Explains that the federal government will require every bank to include a consumer intelligence certification (c.i.
- Argues that a one-time course created by the cfpa outlines the language of mortgage lending, different loan types, the nature of interest rates and the economic market, as well as the full, arduous process of foreclosure.
- Explains that a c.i. cert is required to take out mortgage loans, which is equivalent to applying for vehicle registration with the dmv.
- Opines that requiring a mortgage-lending course and consumer intelligence certification for all consumers would have two positive effects upon the foreclosure crisis.
- Opines that a c.i. cert will make the mortgage lending process more complex, longer, and take more patience from the consumer and the banks.
- Explains that mandatory classes have been a tactic to ensure the safety of our society. a certification like this ties perfectly with the philosophy of the cfpa, and barack obama himself.
- Explains that the bush administration committed $59,900,000,000 to the bailout of fannie mae and freddie mac in order to "provide needed housing reform"
- Explains that fannie and freddie were fully absolved into the federal government, and their debt has yet to be repaid. the second part of their plan outlines a novel form of repayment to our government.
- Explains that citigroup received 45.7% of the bank industry bailout money, and still owes $25,000,000,000. private banks like this one, along with specialized mortgage lending companies, possessed the largest amount of toxic assets and are the greatest source of increasing foreclosure rates.
- Explains that the government's foreclosure ceiling is a government-mandated limit on foreclosure rates. if citigroup keeps its foreclosure rate below this ceiling, it will be counted toward its repayment and remove 5% of its debt per year.
- Explains that citigroup's debt can be repaid in approximately 20 years, in addition to the interest on its remaining balance per year.
- Explains that citigroup will not be paying the federal government exclusively through dividends, but through the value to the market. if a plan like this was instated, it would effectively end the foreclosure crisis.
- Explains that citigroup is noted for its cooperation with consumers regarding foreclosure, making it an exception in its field. a ceiling program would increase the compatibility of banks with their customers.
- Opines that the second plan is both probable and calculable. it renders responsibility to the consumer, banks, and the federal government, while paving a constructive path towards ending foreclosure.
- Opines that president obama and the united states senate could evolve this two-part plan into legislation to solve the foreclosure crisis. every american citizen deserves a future that encourages smart consumerism, vertical benefits within our economic structure, and lucid loaning processes.
2312 wordsRead More - The Detece Crisis: The Subprime Foreclosure Crisisanalytical essayThe subprime mortgage crisis was a contributor to the decline of the internal structure of the city. One of the more significant effects occurred when banks financed the sale of residential property with very low mortgage rates (Ashton, 2010). This encouraged many people to buy larger houses that they could otherwise afford. Houses were bought in a time of prosperity with no thought that perhaps this could and would change in the future. Later, the banks increased their mortgage rates on these residential properties, or introduced previously hidden fees (Newman & Wyly, 2004). This produced financial hardship resulting in the home owner's inability to pay a mortgage, ultimately causing the dereliction of neighbourhoods as people would simply vacate what had been their family homes, since they owed more on their houses then they were actually worth. Factors that predicted a greater foreclosure rate included the following: loans for homes in poorer areas, loans with a higher loan to value ratio, and loans with higher interest rates (U.S. GAO, 1997). Unfortunately, this resulted in many houses and neighbourhoods that were once vibrant and developing to become empty and deserted. Communities and neighbourhoods were no longer the safe family areas that they had once been. Increasing numbers of residential properties became deserted as the population in these neighbourhoods continued to decline. The large number of vacant houses and entire neighbourhoods allowed people who could not afford houses to live in these abandoned houses illegally. These squatters did not maintain the properties since they were not property owners. This resulted in further decline and ruin of the communities.
In this essay, the author
- Analyzes how the subprime mortgage crisis contributed to the decline of the city's internal structure.
- Explains that redlining was a common practice in american financial institutions in the 1970s, and detroit did not escape its destructive effects. realtors contribute to the internal social structure of neighbourhoods.
- Explains that predatory lending practices include exploitation of borrowers with hidden loan terms or high fees, home repair and refinancing schemes for long-term residents with significant equity in older homes needing repair, and foreclosure.
635 wordsRead More