Introduction
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.
The Risks of the Housing Boom
Whenever an investment is made there is risk that accompanies it, the higher the risk of the investment, the higher the expected return. The same is true with the real estate market, and the mortgages banks issue. Each loan a bank gives out to a customers is an investment. To a prime borrower banks could loan them money at a stable, fairly low interest rate because these borrowers have a low risk of defaulting. However during the real estate boom banks were able to lend a large amount of subprime mortgages, mortgagees given to less than prime borrowers, with an inflated interest rate to make up the risk of these borrowers defaulting. “Overall, the subprime market was $600 billion in 2006, 20 percent of the $3 trillion mortgage market, according to Inside Mortgage Finance. In 2001, subprime loans made ups just 5.6 percent of mortgage dollars.” (Kratz, 2007) Banks were lending out to subprime borrowers at a lower teaser rate, giving borrowers an affordable payment because the interest rate was held artificially low until the teaser rate period was ov...
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...isk there would be no such thing as a subprime loans, any mortgage issued banks would be guaranteed a payback in full of their loan. However there will always be risk with investment and mortgages, and as always the higher the risk the higher the payout, but if institutions are not responsible in weighing the risk, and taking the right amount of risk a lot can go wrong as it did in 2008. Many institutions can be held accountable for the housing crisis in 2008, whether it be the banks for lending risky subprime loans, borrowers for risking their house on future assumptions like a higher pay right or their home appreciation, or investors buying mortgaged backed securities without researching what exactly comprised these securities. The housing crisis shows that everyone takes a risk when it comes to investing and everyone may pay the consequences of risking too much.
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.
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- Sub-Prime Mortgages and the Death of the American Dreamexplanatory essaySub-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 - 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 - 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 - In order to solve the problems that America faces, a brief overview of their origin is necessary. Misplaced confidence in the continuous bright future of home prices and the attempts of lenders to profit in every way possible were major causes of the current crisis. Lenders often made mortgage contracts with little consideration for the ability of the recipient to repay. They were able to do this with little risk for themselves because these loans were bundled and sold off to investors. Furthermore, the demand for loans with more flexible standards was tolerated by the lenders because the lenders believed, just as those demanding the loans did, that the increase in home prices had no foreseeable end (Shiller 50). Many people saw an opportunity to make money off of subprime and adjustable-rate mortgages, and the fantasy of endless price increases overcame reasonable judgment.
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.
1840 wordsRead More - The 2008 Economic Recessionexplanatory essayThe 2008 Recession Between January 2008 and February 2010, employment fell by 8.8 million, the largest decline in American history. The 2008 Recession, which officially lasted from December 2007 to June 2009, began with the bursting of an 8 trillion dollar housing bubble. Job losses during the recession meant that family incomes dropped, poverty rose, and people all over the country were suffering. Things like this don’t just happen. Policy changes incorporated with the economy are often a major factor.
In this essay, the author
- Explains that the 2008 recession, which officially lasted from december 2007 to june 2009, began with the bursting of an 8 trillion dollar housing bubble.
- Analyzes how reagan's approach was a departure from his immediate predecessors. reagan enacted lower marginal tax rates, simplified income tax codes and continued deregulation.
- Explains that the reagan and carter administrations helped cause the 2008 financial crisis. clinton repealed the glass-steagall act which limited the banking industry.
- Explains consumer spending is the amount of money spent by households in an economy. it includes durables, such as washing machines, and nondurables like food.
- Explains that consumers will increase their spending by giving out money, or through tax cuts, which allows businesses to earn more revenue, leading to a recession.
- Explains that subprime mortgages are a financial tool that helps those that don't have good credit score, get home loans. the qualities that make them attractive also carry risks.
- Explains how high-risk mortgages became available in the early and mid-2000s, with private-label mortgage-backed securities (pmbs) providing most of the funding of subprime mortgage. when house prices peaked, refinancing and selling became less possible.
- Explains that deregulation was the major factor for the 2008 recession, which started back to the reagan and carter administrations.
- Explains that subprime mortgages were major factors of the 2007-2009 economy collapse. all of america suffered from the 2008 recession.
1050 wordsRead More - The Great Recessionanalytical essayEvery few years, countries experience an economic decline which is commonly referred to as a recession. In recent years the U.S. has been faced with overcoming the most devastating global economic hardships since the Great Depression. This period “a period of declining GDP, accompanied by lower real income and higher unemployment” has been referred to as the Great Recession (McConnell, 2012 p.G-30). This 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. economy. By examining the nation’s economic struggles during this time period (2007-2009), it will conclude that the current macroeconomic situation deals with unemployment, which is a direct result of the recession.
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 - 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 - The foreclosure crisis has been and will probably always be a problem facing the American population. Even if it has recently begun to be a major problem for the US as well as the global economy, it hasn’t simply sprouted out overnight. A major spark that created this crisis was the housing boom; in fact it was because of this boom that it began to take form. Since people were working for their money in the 90’s, mortgage lenders decided it was the best time for making the most money, to do this they used what is called a subprime mortgage loans to give to everyone who walked into their office, with or without proper qualification (a qualified person being one with an income to debt ratio of around 30 percent). These mortgages consisted of a “fixed” low rate for a number of years and then raised 100 percent or more in the years following, and adding fuel to the fire was the fees which the loan companies imposed on defaulted mortgages, making it almost impossible to afford the monthly payment, and were the main reason for the horrible crisis that would ensue. These homeowners would them take out equity loans in order to make some extra cash in order to keep their heads above water financially, which instead worsened their situation as the housing market started its decline. While the people who had acquired the undesirable loans were suffering enough on their own, banks and other institutions began to add fuel to flames by handing out CDOs, or collateralized debt obligations. These CDOs would contain as many as 100 subprime mortgages and were distributed worldwide to many different investors, in order to cover the debt that homeowner were accumulating. These actions set up a terrible domino effect; the more homeowners went into def...
In this essay, the author
- Explains that the foreclosure crisis has been and will probably always be a problem facing the us as well as the global economy.
- Explains how subprime mortgages were distributed to investors worldwide to cover the debt that homeowners were accumulating. bear stearns hedge funds closed two offices and foreclosed houses, which froze the money market.
- Opines that banks and financial institutions are at odds with the obama administration due to the fact that they are being asked to help homeowners and small businesses by giving out loans and in the other way, being told to watch their balance sheets.
- Opines that the road to recovery will be a long and devastating one because of greedy bankers and no income borrowers.
- Opines that it will be a hard and winding road to travel on but the fruits of the well flowing system are bountiful and plentiful.
1030 wordsRead More - U.S. Economic Crisisexplanatory essayThe relationship between mortgages, the housing crisis and Wall Street were the excess capital globally pushed an enormous amount of money into the U.S mortgage market, so then the idea of generating higher returns originated. Mortgages were now offered at a high mortgage rate to borrowers. The decline in housing prices led to rising defaults among subprime and ALT A borrowers, borrowers with adjustable –rate mortgages, and borrowers who had made only small down payments, many investors on Wall Street refused to buy mortgages backed securities that led to this financial crisis. As an example large financial firms, including Bear Stearns, Merrill ...
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 - This does not dismiss the responsibility of the financial institutions. In the eyes of the buyer, the financial institutions would never allow the borrower to borrow beyond their means, right? Wrong. In pursuit of increased profits based on the additional interest from an overinflated loan, the qualifications began to lax and deals were made to ensure financing. Previously, banks did not allow mortgages greater than 100% of the value of a house. In addition, mortgages were traded like playing cards, continuing to inflate the value of property. With the expectation the market would continue to grow, financial institutions allowed mortgages over the value of a property. This entire situation has led to an increase in foreclosures but a necessary decrease in property value.
In this essay, the author
- Explains that the foreclosure crisis was not created by one issue but a combination of issues. individuals and financial institutions are responsible for the current mess.
- Opines that financial institutions are responsible for allowing the borrower to borrow beyond their means. in pursuit of increased profits based on the additional interest from an overinflated loan, the qualifications began to lax.
- Explains that the financial institutions were bailed out by taxpayers but the banks in turn have not had the same compassion for homeowners. the overall economic situation has led to job loss and additional defaults on property.
- Explains that some banks offer grace periods, longer repayment schedules, lower interest or a decrease in the loan balance. their plan incorporates these in different configurations which will not cause hardship to either group and will encourage homeownership.
- Explains that banks would be required to accept the amount the home sells for as payment in full and forgive additional loan amount. the bank would have first option to finance with the new buyers, when possible, at competitive interest rates.
- Explains that without property tax, the overall budget for each community is reduced. when the property is purchased, either the bank or the new owner is responsible for the taxes plus fees and penalties.
- Explains that if the buyer is a college graduate, 50% of their total student loan will be eligible for interest credit on their taxes.
- Explains that a mortgage review based on the employment status of the individual would be required if they can prove that the job loss was not due to personal negligence, i.e., proof of receiving unemployment compensation.
- Explains that foreclosed properties come with a number of required repairs. if the homeowner hires an outside contractor to complete repairs, the formula can be generated to allow for tax credit. this will stimulate both purchases of less desirable properties and local contracting and the local economy.
- Analyzes jay thompson's article 'how the government can fix the foreclosure crisis' and argues that free market economies are based on supply and demand, so there should be no government interference in stabilizing the market.
- Opines that there is no one formula which will fix this situation. the banks will need to tailor their response to the needs of the individual homeowner based on the options provided in this essay.
1137 wordsRead More