2008 Financial Crisis Research Paper

Is it possible for another real estate-based financial crisis to occur?
To answer this question we have to look back at the historical data of housing market, banks, government policies and the economy as a whole and find out why this financial crisis occurred at first place. For the last 30 years house prices have have had a steady incline but as we hit year 2000-01 housing market had sudden change – loan supply went up, so did housing supply and demand and then sudden crash. What happened in 2001 that lead to price increase and then financial crisis in 2008? There wasn’t much change in policies in 2007, then how could we have a crisis in 2008? There were many causes for the crisis but the most important ones I believe that led to this outcome
Banks had given out so too many loans at low interest rate – to generate quick revenue banks issued “high ranked” securities of a pile of mortgage loans to investors and earned revenue right away instead of earing it back in 30 years of process. That extra cash let them gave out more loans house loans which increased the housing demand and the high demand led to high house prices. As I said before, real estate had a steady increase for the past 30 years and then the sudden fluctuation were giving signs of bubble. Due Diligence says that proper motive to acquire an asset includes “tax implications, the spreading of risks, purchase of assets at a discounted price, or profiting from fragmenting assets and it should have synergy and efficiency with other assets.” Mortgage Back Securities did not have synergy and efficiency with home loans, investors failed to notice related information to income because they did not have any source to find out if these AAA rated securities were any
(Reader – page 99). These lenders included commercial banks and thrifts, Wall Street investment banks, ad independent mortgage lenders. It was a competition between these companies and they acquired many small firms to expand their lending. Ameriquest’s, an independent mortgage lender, loan origination rose from $4 billion to $39 billion between 2000 and 2003; rest of the companies followed. How did this happen? Real Estate Cycle Theory puts it four phases – recovery, expansion, hyper supply and recession. First there was de-regulation for financial industry, then real estate construction which caused lot of supply and then recession. Subprime loans are already risky; thanks to brokers who had many lenders to choose from, and thanks to those lender who were willing to give loans to anyone – caused the demand of subprime loans to go up. People were unable to make their payments which led to bankruptcy. But, since those loans were CDS banks were not able to pay back to investors which caused banks such as Wa-Mu to go bankrupt thus recession. But why did banks gave out loan at the first place, if they knew buyers will not be able pay back? Because the securities these banks sold were total fraud, they were not AAA rated. Many of these AAA rated securities included house loans that were defaulting, banks already knew those securities did not worth