The financial crisis started in the US housing market. The crisis spread across the world and damaged the economies of many countries that led to a number of financial institutions based in the US to collapse. This paper aims to discuss on imprudent mortgage lending as a cause in the 2008 financial crisis, evaluate any regulatory changes and to offer future resolutions to the problem.
The US real estate boom is a major factor that led to the banking crisis. Before the crisis, the U.S housing market was flourishing with rising house prices. The government ambition that people have their own houses loosened financial strain for them (people with lesser income). The rising house prices that followed and slack regulation made the real estate business
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The loose monetary policy was a major contributor to the rapid growth in mortgages to brokers. The low interests in the U.S persisted and created the so-called ‘global imbalance’ that entailed the juxtaposition of excess savings by some countries and excess consumption by deficit countries (the US). This accrued to an unsustainable U.S economy. Even after the Federal Reserve started tightening monetary policies in 2004, the mortgage rates remained low in the US (Baily et al. 2008). The Fed continued to pump liquidity into credit markets to ensure credit would continue to flow at low rates of …show more content…
The credit growth resulted in large fluctuations in the economy. Household indebtedness in the US rose rapidly driven by the increased mortgage financing, with low interest rates and financial innovation as contributing factors. Increased leverage, due to inadequate oversight, left houses vulnerable to a decline in prices. This led to a tightening in credit conditions and the economic activity brought to a slowdown. The correction harmed consumers (they ran into debt servicing problems). This resulted to higher default rates where rapid credit growth had been experienced with this extending to other