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Banking Regulation Essay

1154 words - 5 pages

Banking Regulation Page 1
Owning a home is part of the 'American Dream'. It allows people to take pride in a property and engage in a community for the long term. However, homes are expensive and most people need to borrow money to get one. Conditions were right for many people to achieve that dream in the early 2000s, mortgage interest rates were low, which allow you to borrow more money with a lower monthly payment. In addition, home prices increased dramatically, so buying a home seemed like a sure bet. Lenders understood that homes make good collateral, so they were willing to participate.
In 2007, the US economy entered a mortgage crisis that caused panic and financial ...view middle of the document...

” There are a number of theories as to what led to the mortgage crisis. Many experts and
economists believe it came about though the combination of a number of factors in which
subprime lending played a major part.
The mortgage meltdown actually began with the bursting of the U.S. housing
“bubble” that began in 2001 and reached its peak in 2005. A housing bubble is an economic bubble that occurs in local or global real estate markets. It is defined by rapid increases in the valuations of real property until unsustainable levels are reached in relation to incomes and other indicators of affordability. Following the rapid increases are decreases in home prices and mortgage debt that is higher than the value of the property. Many economists believe that the U.S. housing bubble was caused in part by historically low interest rates. In response to the crash of the dot-com bubble in 2000 and the subsequent recession that began in 2001, the Federal Reserve Board cut short-term interest rates from about 6.5 percent to 1 percent. Greenspan admitted in 2007 that the housing bubble was fundamentally engendered by the decline in real long-term interest rates.
By 2005, the housing bubble had burst and federal interest rates had climbed.
Foreclosures of homes purchased with subprime loans had risen drastically, and there
was every indication that they would continue to climb. Despite these warning signs,
subprime mortgages continued to gain in popularity. In Massachusetts, for example,
subprime loans fueled by refinancings grew from 1.6 percent of mortgages in 2000 to
12.3 percent by August 2005.

Banking Regulation Page 3
With the subprime industry’s growth came problems for homeowners. Subprime lenders
foreclose on properties much more frequently than do conventional lenders. The
prevalence of subprime loans contributed to a 31-percent spike in foreclosure filings in
the first half of 2006. Economists in warned that if home prices fell, these
subprime loans would accelerate a downturn as overleveraged homeowners throw their
homes on the market or lenders sell foreclosed properties at bargain basement prices.
Another bad omen for the housing market was the collapse of the subprime mortgage
industry in early 2007. By early January 2007, the United States’ subprime mortgage industry started to show signs of collapsing from higher-than-expected home foreclosure rates.
As homeowners fell behind in their mortgage payments in ever-growing numbers,
foreclosures...

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