A housing bubble is a period of above-average levels of house price growth. According to BusinessDictionary.com, “A housing bubble is a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices,” (BusinessDictionary.com). A drop in prices back to or lower than the original price level must then follow this. The drop in house prices begins at the point where the bubble “bursts”. According to McConnell, Brue, and Flynn’s Macroeconomics, “Some of the primary causes of the housing bubble are low mortgage interest rates, low short-term interest rates, relaxed standards for mortgage loans, and irrational exuberance,” (McConnell) There are many participants who contributes to …show more content…
In this essay, the author
- Explains that a housing bubble is caused by unjustified speculation in the housing market that leads to rapid increase in real estate prices.
- Explains that subprime mortgage loans exacerbated the financial crisis of 2007–2008, resulting in an increase in home prices that was clearly unsustainable.
- Explains that mortgage-backed securities exacerbated the financial crises of 2007 – 2008. they reduced the risk of exposure, or cost, that banks faced after issuing these subprime loans.
- Explains that when housing prices began to decline and individuals started to default on their mortgages, this reduced or completely eliminated the value of these mortgage-backed securities.
- Explains that the american international group (aig) issued billions of dollars of collateralized default swaps to compensate the holders of mortgage-backed securities.
- Analyzes how michael lewis' "the big short: inside the doomsday machine" explores the stock market crash of 2008.
- Explains how investors started looking for more diverse ways of investing money, which led to the creation of mortgage bonds for investment.
- Describes how michael burry, a money manager, shorted mortgage bonds to bet against being paid at the appropriate time. credit default swaps pay out only if the borrower defaults on his loan.
- Explains that while dr. michael burry approached banks with credit default swaps, american international group was building and selling collateral debt obligations.
- Analyzes how the housing market began to plummet in 2007, when credit default swaps and collateral debt obligations started to pay out. the mortgage crisis turned wall street on its head and changed it irrevocably
- Explains that the troubled asset relief program (tarp) helped during the financial crisis, but it wasn't the only form of rescue.
- Explains the role of the federal reserve as the lender of last resort to financial institutions in times of financial emergencies.
- Explains that the troubled asset relief program saved several financial institutions whose bankruptcy would have caused secondary effects that probably brought down other financial firms. moral hazard is the tendency for financial investors and financial services firms to take on greater risks because they assume they are at least partially insured against losses.
- Explains that subprime mortgage loans exacerbated the financial crisis of 2007-2008 because they increased demand for housing and a rapid increase in home prices that was unsustainable. mortgage-backed securities reduced the risk of exposure, or cost, faced by banks.
- Analyzes how michael burry's quote depicts the refusal of financial analysts. the crash could have been prevented but instead of looking ahead, banks were looking towards their profits.
Mortgage-backed securities reduced the risk of exposure, or cost, that banks faced after issuing these subprime loans. Mortgage-backed securities encouraged banks to keep lending in subprime markets. These mortgage-backed securities reduced the risk exposure that banks faced. This reduced risk increased the amount of subprime loans banks made to the subprime market. However, because of banks also making loans to the groups purchasing the mortgage-backed securities, this reduction in risk was a mere …show more content…
This would only happen if the loans in these investments went into default and were not paid off. According to David Paul, president of Fiscal Strategies Group, American International Group issued $450 billion (Paul). Collateralized default swaps became yet another category of investment security that was highly exposed to mortgage-loan risk. In 2010, author Michael Lewis released a novel title, “The Big Short: Inside the Doomsday Machine”. In the novel, Lewis explores the stock market crash of 2008. He examines the bond market and subprime mortgage bonds that led to the crash. Lewis goes through the crash from the perspectives of the group of people who saw the crash coming and either kept quiet to protect large investments or they were too shocked to speak
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- The Housing Boomexplanatory essayIntroduction In 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 - Foreclosure Crisis- The Result of Unserviceable Debtopinion essayYears of cheap credit, combined with government incentives to get people to purchase homes, debt securitization that hid the risk of low quality loans, and Government Sponsored Entities (GSEs) that lowered standards for purchasing mortgages created a situation that compelled lenders to make riskier and riskier loans. Individuals who had formerly not been able to purchase homes had access to credit like never before. With more and more people buying houses, prices soared and real estate looked like a sure-fire way to make money. Adjustable rate loans or loans with a huge balloon payments were not seen as potentially unaff...
In this essay, the author
- Opines that it's better to rewrite your mortgages so you can make your payments and stay in your homes.
- Proposes giving troubled homeowners an incentive to foreclose, instead of modifying mortgages. this would help recapitalize and force lending institutions to take their losses. falling housing prices would also have a secondary benefit.
- Opines that the most sensible, soundest and kindest solution to the debt crisis caused by the real estate bubble is foreclosure, which is the best way for the housing market to grow again.
- Argues that the real estate market collapsing, including thousands of inevitable foreclosures, is a result of unserviceable debt.
- Opines that the solution is to clear the housing market as quickly and painlessly as possible.
1573 wordsRead More - Financial Crisis Essayopinion 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 - 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.
1574 wordsRead More - Causes for the 2007 Recessionanalytical essay...nce a higher valued house resulted in a low loan-to-value ratio which was lucrative to the lender. Having a good standing with the lender meant more business in a booming housing market for the valuing agency, so this incentivized them to provide such misinformation that eventually led to the burst of the bubble.
In this essay, the author
- Explains that the trend of lax mortgage processes and risky loan applications caused house prices to shoot up to an all-time high by the year 2006. the danger of adjustable rate mortgages became obvious to buyers when their teaser period expired.
- Explains that more and more houses ending up in foreclosure led to huge losses for the financial institutions, with recovery rates as low as 25% of the amount.
- Explains the concept of asset-backed securities, which became rampant during the housing bubble.
- Explains that the great recession was attributed to the burst of the u.s. housing bubble and the subprime mortgage crisis.
- Analyzes how lax standards on the part of lending organizations led to the financial crisis and the great recession.
1027 wordsRead More - U.S. Economic Crisisexplanatory essayIn which, that led to the whole real estate bubble to bust due to the U.S Market thanks to the securitization and the supply response of financial assets to the demand of such assets according to stock-market investors.com.
In this essay, the author
- Explains that the united states is currently experiencing the biggest financial crisis after the great depression. they will discuss the relationship between mortgages, the housing crisis and wall street.
- Explains that the current economic crisis started from the real estate market, focusing on subprime mortgages and lenders that loaned money to high risk borrowers.
- Explains the relationship between mortgages, the housing crisis and wall street. the decline in housing prices led to rising defaults among subprime and alt a borrowers.
- Explains that fiscal policy is the government expenditure and revenue collection to influence the economy before the current economic crisis.
- Explains that the economy of the united states is the world's largest and its gdp is comprised of consumption, investment, government spending and net export.
- Explains the different types of unemployment, including frictional, structural, demand-deficient, cyclical, and seasonal. unemployed works have no job, while underemployment involves underutilization of a working individual's skills.
- Opines that the economy is at its worst since the great depression and the government needs to make drastic cuts with spending and stop importing cheaper goods.
871 wordsRead More - Stock Market Crash Case Studyexplanatory essayBy the time March 2007 came around, you had the failure of Bear Stearns because of their hand in underwriting a multitude of the investments tools that were linked precisely to the subprime mortgage market and it became apparent that the whole subprime lending market was in danger. “Homeowners were defaulting at high rates as all of the creative variations of subprime mortgages were resetting to higher payments while home prices declined. Homeowners were upside down - they owed more on their mortgages than their homes were worth - and could no longer just flip their way out of their homes if they couldn 't make the new, higher payments. Instead, they lost their homes to foreclosure and often filed for bankruptcy in the process.” (Kosakowski, 2008)
In this essay, the author
- Explains the factors that led to the 2008 stock market crash, such as the high subprime mortgages, and the rise of adjustable-rate loans.
- Explains that mortgage-backed securities (mbs) became popular with commercial investors and investors benefited from the premiums and interest payments that the individual mortgages contained.
- Explains that credit derivatives were designed to hedge against a company's creditworthiness, similar to insurance. the cds market was unregulated.
- Explains that the subprime lending market was in danger when bear stearns failed to underwrite a multitude of investments tools. homeowners were defaulting at high rates, owing more on their mortgages than their homes were worth.
- Explains that the dow jones industrial average (djia) reached a closing high of 14,164 on october 09, 2007 despite everything that happened.
- Describes how lehman brothers collapsed due to the collapse of the subprime mortgage market and filed bankruptcy. the dow closed at 10,917, down 499 points.
- Explains that lehman's collapse brought the value of the reserve primary fund to below one dollar per share in september 2008; investors were only allowed 97 cents. this caused an alarm in the money market fund industry.
- Explains that on september 18, 2008, talks of a government bailout began, sending the dow up 410 points and the following day treasury secretary henry paulson recommended that the troubled asset relief program (tarp) be accessible.
- Explains that citigroup bought wachovia's assets in a $2.2 billion all-stock deal, while jpmorgan chase bought washington mutual. goldman sachs, merrill lynch, and bank of america suffered as well.
- Explains that 2008 was the worst year for the standard & poor's 500 since 1937, and the dow jones industrials dropped 33.8%, making 2008 the nastiest annual decline ever experienced by most current investors.
1191 wordsRead More - Subprime Crisis Essayexplanatory essaySubprime crisis, also regularly known as the mortgage meltdown is a financial crisis that occurred between the years 2008 to 2009. It is a result of excessive borrowing to numerous homebuyers who have poor credit scores. This act of lending is called subprime lending. During this period, loads of homebuyers defaulted on their monthly payments as their interest rates increased with time. With that, there was a sharp upsurge in mortgage foreclosures. This led to the numerous failures in participating financial institutions that act as subprime or mortgage lenders. As if this was not crucial enough, all this also took a toll on investors who have played a role in facilitating subprime lending to the borrowers by buying mortgage-backed bonds. Although it has only brought visible attention in the year 2008, it started with HSBC who announced that they would be putting aside US$11 billion to cover costs due to rising losses and defaults in subprime mortgages in February 2007. Since then, major losses started to hit other financial institutions and the mortgage market started to collapse. The subprime crisis was caused by a few major factors and it involved several major parties in the US.
In this essay, the author
- Explains that the subprime crisis, also known as the mortgage meltdown, was caused by excessive borrowing to numerous homebuyers who had poor credit scores.
- Explains that subprime lending is targeted at borrowers who don't meet the criteria or cannot afford the normal prime loans. these loans come with higher interest rates and are considered to have higher risks.
- Explains that the subprime crisis broke out when the housing bubble burst without parties realizing the possible occurrence of it.
- Explains that low interest rates kept monthly mortgage payments affordable for borrowers even when the housing price increases. subprime loans such as adjustable rate mortgages and interest only mortgages made it easier for the poor to buy houses.
- Explains that mortgage lenders/banks created mortgages from fixed deposits but it limited the funds that they could lend to the borrowers. they created investment products such as collateral debt obligation (cdo) and mortgage backed security (mbs).
- Explains that the community reinvestment act, which encourages financial institutions to meet the needs of communities, enforces the banks to extend their mortgage lending to lower income families.
- Explains the federal reserve's role in the subprime crisis.
1432 wordsRead More - Subprime lending occurs when a financial institution lowers lending standards and lends to individuals who cannot prove their credit worthiness, usually possessing a credit score below 600. This also includes individuals who lack sufficient income or assets. Individuals who cannot secure a conventional mortgage will turn to subprime mortgages, securing their loans at a higher than prime interest rate. Not only will there loans have higher rates of interest, these rates can climb. Unlike traditional mortgages, there is often a pre-payment penalty with a subprime mortgage as well as other miscellaneous fees. The originators of these loans will often pool them together into mortgage securities which will then be sold off to investors, removing the loans from their balance sheets.
In this essay, the author
- Explains that subprime lending occurs when a financial institution lowers lending standards and lends to individuals who cannot prove their credit worthiness.
- Explains that fannie mae and freddie mac represent the lion's share of mortgages in the united states.
- Explains that freddie mac was created to compete with fannie mae and make for a hotter secondary market.
- Explains that subprime lending increased an average of 25% per year between 1994 and 2003. in 2007, the market began seeing warnings about the effects of defaults on the mortgages comprising many mortgage securities.
- Explains that bernanke's concerns were over a forecasted $100 billion loss on securities associated with subprime mortgages. as the bottom falls out, financial institutions begin buying other institutions, as government bails out.
- Explains that conventional loans issued to people with credit scores below 620 were only 0.22 percent. the senate is discussing reform; deciding what to do with fannie and freddie.
- Explains that the greatest benefit of subprime mortgages is the resulting rise in homeowners. bruce marks from the neighborhood assistance corporation of america is a champion for the cause, but his approach is unorthodox.
- Explains that marks and the naca believe the focus should be on home ownership, as opposed to the current goal of preventing housing bubbles. subprime lending proves that individuals with poor credit are still a viable risk.
- Analyzes the reemergence of subprime lending as a cause for alarm. financial institutions are increasing their credit offers to risky borrowers.
- Explains that subprime, "fallen angels" and nonpremium led to a crisis that devastated the economy and encumbered the borrowing potential of low risk consumers.
- Opines that the expansion of credit subprime lending for mortgages is commendable, but tighter legislation and restrictions are needed to protect the market as a whole.
- Argues that a nation of renters is not fiscally sound, but we cannot afford to let the packaging of securities and high risk lending go unchecked at the cost of another bursting bubble.
- Summarizes the statement of ben s. bernanke, chairman board of governors of the federal reserve system before the committee on banking, housing, and urban.
- Describes the financial markets and institutions of the united states senate.
- Cites silver-greenberg, jessica, and tara bernard. "lenders again dealing credit to riskyclients." the new york times.
- Explains that the subprime crisis is a timeline from cnnmoney. cable news network. timiraos, nick.
- Cites timiraos, nick, "how much will mortgage rates rise in fannie, freddie overhaul?" the wall street journal.
1463 wordsRead More - Bank of America and the Mortgage Crisisexplanatory essayIn 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...
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.
983 wordsRead More