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Bank of America and the Mortgage Crisis

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983 words
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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.
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