Since brokers were paid on commission, there was an incentive to secure more loans in-order to increase their personal income. This was compounded by the use of NINA loans and the increasing demand for mortgage backed securities. In some cases brokers lied or misunderstood the loan applicant’s income and asset information, which lead to much higher than normal defaults. These mortgage bankers and brokers were making big profits and they were not paying attention to where the money was going. The data and spreadsheets were the only source of information they cared about.
Prior to mid 2007, regional banks securitised around one-third of their housing loans while the major banks securitised less than 10 per cent. As a result, despite their smaller size, the regional banks accounted for roughly 40 per cent of Residential mortgage-backed securities issuance whereas the major banks accounted for 20 per cent (Debelle, 18 November 2009, pp.44). The financial crisis had a negative impact on securitisation leading it to the residential mortgage-backed securities to have credit problems, which made the credit market more cautious. Because of the crisis, there was enormous loss incurred by US and euro area banks from their holdings of mortgage-backed securities.
However, the Federal Reserve required banks to hold a percentage of their client’s deposits in their vaults which meant they were limited to the amount of money they could lend out. So instead of maximizing the allowable amount to lend and waiting for those mortgages to get paid off, they bundled their current mortgages into a Collateralized Debt Obligation (CDO) and sold those CDO’s to investors. This action put money back into their vault and was able to grant more
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.
As William Black coined the term “control fraud” which denotes that this savings and loan debacle was due to the fraud done by the people in power, who run those large corporations. The savings and loans institutions or thrifts were built to provide the housing facilities to the local communities. Basically they were built for single house families. Keeping this goal in mind it provided individuals with low interest loans. But by 1970s this model began to change when the interest rates started rising.
With a booming housing market lenders gave out mortgages to people with poor credit even with the high risk of default that comes with it. With the increased liquidity lenders were willing and ready to take any risk to increase their returns. As said by Gretchen Morganson “ lenders peddled the most abusive and costly loans to unsophisticated, first-time home buyers. Known as “affordability products,” the mortgages generated big commissions up front and were designed to require refinancing later on — which included yet another round of luscious fees for lenders.” Between 2001 and 2005 there was a nearly 300% increase in the amount of subprime loans given out by lenders.
Beginning in the 1999, the growth of mortgage-backed securities played an important role for what was to happen in 2008. The rise of the subprime mortgage market gain popularity among commercial investors but it soon became obvious that involvements with the mortgage market meant huge trouble for the U.S. financial market. Main factors that contributed to the decline include, the high-risk mortgages, government’s easy-money policy and mortgage insurance, and the failure of banks. The economy in general faced a decline and when the crash was over. To alleviate the pressure that was built up, the government made promises to the public to help prevent such as crisis from happening
The director of the movie Charles Ferguson says the film is about "the systemic corruption of the United States by the financial services industry and the consequences of that systemic corruption. ”(Youtube). In other words, this document based movie is based around the 2008 global financial meltdown that caused the United States economy to fall into a deep recession. The Plot of the the movie is split up into five parts, 1. How we got here, 2.
Housing steps off the roller coaster Housing seems to be putting the excesses of the bubble and the ensuing collapse behind it. The trend in residential real estate, according to interviewees, looks to be returning to the classic principles of supply and demand. As this major segment of the economy returns to textbook fundamentals, confidence in the residential sector should continue to
Housing values have plunged and people are losing their shirts. Yes people did buy in the heat of the market. And now the crash has caused their values to plummet. I know you've heard this over and over, but it happens to be the brutal truth: for a large number of those deals the people should have never have been allowed to buy the homes, and 'creative financing' should have been suspect. No money down deals, loans such as pay option ARM's (where you paid a smaller payment with the interest charges adding to the balance on the back end) seemed too good to be true.
Many researchers and economists argue that the American housing market drug down the entire global economy with risky mortgages being issued to families who didn’t qualify for ordinary home loans. Labeled subprime mortgages, these loans were issued to consumers with undesirable credit (FICO scores < 600). The mortgages had variable interest rates which were initially quite low, but when they reset to higher rates, mortgage payments increased significantly. This made it nearly impossible for consumers to make the payments on time, if at all. Other experts in the field claims that 30 years of deregulation and industry self-regulation allowed risky mortgages to be issued and mortgage-backed securities to be sold to investors, pension funds and financial institutions.
It all started when the housing market in the United States went to bust, a period of time during which economic growth decreases rapidly. As a result, mortgage-backed securities and derivatives lost their
It all begin when the federal reserve began lowering interest rates from 6.5% in 2000 to 1% in 2004. These low interest rates encourage consumers to buy houses and builders to build houses, however the low interest rate was not an accurate reflection of the true demand for houses in the market. The government amended the community reinvestment act to encourage banks to offer mortgages to offer low income families who would ordinarily not qualify for a loan, known as sub-prime mortgages. As the federal reserve began to raise interest rates again, housing prices began to drop and homeowners noticed their mortgages were more than their house was worth. This led to foreclosures and defaults, further depressing housing prices and shrinking the capital of financial
On Monday October 6, the stock market started a weeklong decline. During the years preceding this collapse, sub-prime mortgages thrived. People considered with bad credit risks were offered loans, which in reality they couldn’t afford. However, as long as housing prices were increasing, this poor practice was being pushed aside, due to the fact that the houses could be sold at a higher price if needed. As mortgages became easily available the demand for housing increased and the rise in house pricing made the owners feel rich.
Beginning in 2000, our economy began to see a change in the housing market. The demand for purchasing a home increased causing prices to rise dramatically. Then, in 2007/2008, the housing market crashed. Although many elements were to blame, to prevent another economic disaster, we need to look at all the sources that contributed to housing downturn of 2007¸including, banking loan criteria, greed, and investment institutions. Before the housing crash, prices were climbing fast.
