Causes of the Recession

Topics: Subprime mortgage crisis, Mortgage, Subprime lending Pages: 4 (1633 words) Published: April 9, 2013
Over the past few years our country and the rest of the world has experienced an economic crisis. For the United States, it’s been one of the worst economic recessions since the Great Depression during the 1930’s. The recession was caused by many downfalls but the majority was caused by the collapse of the housing market.

In the years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers, including undocumented immigrants. Lending standards particularly deteriorated in 2004 to 2007. Fannie Mae and Freddie Mac supported the housing industry by providing billions in financing to the mortgage market. Both companies bought safer loans that followed their guidelines. They definitely played a part in the rising of home prices but did not cause the housing bubble. The companies that didn’t meet up the guideline were bought by Wall Street, which caused the housing bubble to become inflated because they were riskier loans. As Wall Street continued to pick up those risky loans, Fannie and Freddie lost their dominant position in the home loan market, as the riskier loans became a larger share of the mortgage market. This was the result of the steady growth of the market during the late 1990’s and early 2000’s leading up to the crisis (NPR, 2011). The housing market experienced steady growth from the period of 1995 to 1999. When the stock market crashed in 2000, there was a shift in dollars going away from the stock market into housing. To get the housing bubble back up to speed there was plenty of cheap money available for new loans in the wake of the economic recession (Huffington Post, 2009). The Federal Reserve and banks liked that the housing market helped create wealth and provided a secure asset that people could borrow money from to help the economy grow. There were a lot of financial additions at the time, which included all sorts of new lending types such as interest adjustable loans,...
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