The 2007-2008 Financial Crisis And Global Recession

The term Global Economic Crisis to me means, the worst economic condition causing financial instability worldwide in 2008. Economists explained the 2007–2008 global economic crisis is with reference to various market and regulatory failures as well as a macro-economic environment of cheap credit during the pre-crisis period (Helleiner 2011). The following states an overview of the global economic crisis.
Since World War II, the U.S experienced a large-scale financial crisis which led to serious recession. The Global Economic Crisis resulted due to both the financial crisis and the downturn in the U.S economy which spread to many foreign nations (2008 Financial Crisis & Global Recession). The documentary, Inside Job (2010), suggests that the

The way homeownership was financed in the U.S was explored in order to understand it. The U.S government has long promoted homeownership, making mortgages available through Federal Housing Administration (FHA) and Veterans Administration (VA) loans, as well as by creating Fannie Mae, Freddie Mac, and related entities. This site briefs the user about information of housing finance and the securitization of mortgages (2008 Financial Crisis & Global Recession 2015). FHA and VA mortgages require lower down payments and offer lower interest rates than conventional mortgages due to a government guarantee on the former. This enables lower income individuals to be able to afford home ownership. Fannie Mae (the Federal National Mortgage Association) was created in 1938, as part of Roosevelt’s New Deal, to purchase and securitize government-sponsored (FHA and later VA) mortgages. In 1970, Freddie Mac (the Federal Home Loan Mortgage Corporation) was created to provide for conventional mortgages the same securitization that Fannie provided for government-backed mortgages (2008 Financial Crisis & Global Recession 2015). The risk of the underlying assets is reduced by securitization. It eliminates that uncertainty and allows the risk to be priced through higher interest rates. Therefore, by pooling together a random selection of mortgages, firms can reduce the overall risk they face since

Prime mortgages are what most people think of as normal mortgages. It is given to borrowers with solid income and decent credit and the borrowers provide full documentation of income, assets, and liabilities. Subprime mortgages are more risky than prime mortgages. Borrowers of this mortgage have weaker credit histories, and no verification of income or assets. Alt-A mortgages on the other hand, fall in between prime and subprime. They are given to borrowers with good credit histories, but who provide lower documentation to support the loan, or who provide less than 20% down payment. Based on the 2008 Financial Crisis & Global Recession (2015) weblog, the key catalyst in the housing bubble was the growth of the subprime mortgage market. Individuals who would not normally qualify for a mortgage would be offered this subprime mortgage. Often times, individuals were not even required to put any money down. These candidates usually had low income and/or poor credit, making the loans very risky. Mortgage brokers reassured potential borrowers that, given the rate price appreciation of houses, they could easily refinance their mortgages after the teaser rates expired. With higher home values, lenders would be willing to refinance the mortgages at lower rates (2008 Financial Crisis & Global Recession 2015). This assertion assumed the borrower’s home value would