Summary: The 2008 Financial Crisis

When thinking of the 2008 economic crisis, the first thing that comes to mind is the housing market bubble. There are many factors that come into play regarding why the housing market crashed. Historically, real-estate was always a solid and stable investment. But with the development of the complex packaging of mortgages, a bubble was created through lenient credit agencies with little government regulation, as well as fraudulent deceptive practices by mortgage brokers, leading to a crash in the global economy. The primary reason for the 2008 financial crash was the housing market. It is not necessarily that the nature of the housing market was itself volatile, but rather because of the irresponsibility of credit rating agencies and banks.

Eventually, what began to happen was the private sector started to create mortgage backed securities using sub-prime mortgages. A sub-prime mortgage is a loan given to somebody with a low credit score and or insufficient income to make the monthly payments on the loan. The banks needed to develop new ways to package these sub-prime mortgages in order to market them as beneficial. By packaging them together and having rights to cash flows, they were able to receive the best ratings from the credit rating agencies. Along with having a perfect rating they were also backed by insurance in case of default. This further perpetuated the bubble as investors were under the illusion that these securities were completely safe to invest

Technically the bank did not give out the loan The originators of the loans are called mortgage brokers. These brokers used numerous deceptive practices to sell homes to people who couldn’t actually afford it. To make matters worse, they worked on commission. So they were incentivized to open up as many loans as they could. One of the deceptive practices used was offering adjustable rate mortgages. This means that for the first three years the buyer only has to pay a seemingly affordable monthly payment(Aziz 212). But after the three years is up, the payment significantly increases. Brokers would tell buyers that in three years you will not have to worry about the increase, because the value of the house will increase enough to refinance. They would also claim that your salary will increase enough in order to afford the new payment. Another practice similar to this is “interest only loans” and “negative amortization loans.” With the “interest only loan,” the buyer pays only the interest, rather than initially having to pay the principle. On top of that, with the “negative amortization loan,” the buyer doesn’t even have to pay the entire monthly interest. It eventually adds up to the point that the buyer cannot afford