1、Boom and burst in the housing market
Low interest rates and large inflows of foreign funds created easy credit conditions. Subprime lending contribute to increase the housing demand.This fueled rising house prices.This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates. This led to a building boom. Easy credit encouraged borrowers to obtain ARM. If borrowers could not make the payments ,they would try to refinance. Refinancing became more difficult, when house prices began to decline in USA. Borrowers found themselves unable to afford higher monthly payments ,then default. This places downward pressure on housing prices.
Speculation in residential real estate has been a contributing factor. Media widely reported condominiums being purchased while under construction, then being sold for a profit without the seller ever having lived in them. Speculative bubbles are fueled by "contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising." Speculative borrowing has been cited as a contributing factor to the subprime mortgage crisis.
3 、High-risk mortgage loans and lending /borrowing practices
Lenders began to offer more loans to higher-risk borrowers. The risk premium required by lenders to offer a subprime loan declined. Lenders have offered increasingly risky loan options. Mortgage brokers, while profiting from the home loan boom, did not examine whether borrowers could repay. Mortgage fraud by borrowers increased.
Securitization, combined with the high ratings, meant that mortgages could be originated almost at will, with the risk shifted from the mortgage issuer to investors at large. Issuers had incentives to lower their underwriting standards to increase their total profit. Investment banks placed the MBS into off-balance sheet entities. Moving the debt enabled large financial institutions to increase profits but augment risk. It gave rise to a form of moral hazard. The current global credit crisis can be blamed on the securitization of such mortgages.
5 、Inaccurate rating
High ratings encouraged investors to buy MBS, helping finance the housing boom.As rating agencies lowered the credit ratings in MBS. financial institutions had to lower the value of their MBS and acquire additional capital via issuing new shares of stock so as to maintain capital ratios.Thus ratings downgrades lowered the stock prices of many financial firms.That influence the Wall-street
6 、Government policies
In order to achieve the goal of Increasing home ownership of USA,The government learned on GSE to lower lending standards.Besides this, incentive payments were paid by government to let the GSE buy MBS.And directed the ratio of issuing to low-income borrowers .Thus fulfilling their government mandate to help make home buying more affordable.
7 、Policies of central banks
There are time lag between identifying an asset price bubble and determining the proper monetary policy to deflate it.The most important contributing factor is interest rate.The monetary policy of low interest rate was made primarily to deal with the effects of the soften market.However,that stimulated the house market.While the rate increased,homeowners can’t afford the payments. Thus the mortgage market went sour.
8 、Financial institution debt levels and incentives
Borrowing at a lower interest rate and investing the proceeds at a higher interest rate is a form of financial leverage.High debt levels resulted in large losses when house prices began to decline and mortgages began to default.
9 、Credit default swaps
CDS are insurance contracts used to protect debtholders from the risk of default.However,it is used frequently on speculation rather than on hedging risks. As the net worth of banks and other financial institutions deteriorated because of losses...