Subprime mortgage

Topics: Subprime mortgage crisis, Mortgage, Subprime lending Pages: 49 (17633 words) Published: February 26, 2014

Subprime mortgage crisis
The subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system.[1] Approximately 80% of U.S. mortgages issued in recent years to subprime borrowers were adjustable-rate mortgages.[2] After U.S. house prices peaked in mid-2006 and began their steep decline thereafter, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and U.S. government sponsored enterprises, tightening credit around the world. Contents

1 Background and timeline of events
1.1 Mortgage market
2 Causes
2.1 Boom and bust in the housing market
2.2 Speculation
2.3 High-risk mortgage loans and lending/borrowing practices 2.4 Securitization practices
2.5 Inaccurate credit ratings
2.6 Government policies
2.7 Policies of central banks
2.8 Financial institution debt levels and incentives
2.9 Credit default swaps
2.10 US Balance of Payments
2.11 Boom and collapse of the shadow banking system
3 Impacts
3.1 Impact in the U.S.
3.2 Financial market impacts, 2007
3.3 Financial market impacts, 2008
4 Responses
4.1 Federal Reserve and central banks
4.2 Economic stimulus
4.3 Bank solvency and capital replenishment
4.4 Bailouts and failures of financial firms
4.5 Homeowner assistance
4.5.1 Homeowners Affordability and Stability Plan
5 Regulatory proposals and long-term solutions
5.1 Other responses
6 Implications
7 See also
7.1 Other housing bubbles
8 References
9 Further reading
10 External links
[edit] Background and timeline of events
Main articles: Subprime crisis background information, Subprime crisis impact timeline, United States housing bubble, and United States housing market correction

Factors contributing to housing bubble

Domino effect as housing prices declined
The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006.[3][4] High default rates on "subprime" and adjustable rate mortgages (ARM), began to increase quickly thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Falling prices also resulted in homes worth less than the mortgage loan, providing a financial incentive for borrowers to enter foreclosure. The ongoing foreclosure epidemic that began in late 2006 in the U.S. continues to be a key factor in the global economic crisis, because it drains wealth from consumers and erodes the financial strength of banking institutions. In the years leading up to the crisis, significant amounts of foreign money flowed into the U.S. from fast-growing economies in Asia and oil-producing countries. This inflow of funds combined with low U.S. interest rates from 2002-2004 contributed to...

References: 3. ^ "Episode 06292007". Bill Moyers Journal. PBS. 2007-06-29. Transcript.
17. ^ "How severe is subprime mess?". Associated Press. 2007-03-13. Retrieved 2008-07-13. 
19. ^ a b "CARPE DIEM: The Rise and Fall of the Subprime Mortgage Market". 2008-07-17. Retrieved 2009-02-27. 
21. ^ Mortgage Bankers Association (2007-06-12). "Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey". Press release. Retrieved 2008-07-13. 
23. ^ a b Ben S. Bernanke. "Financial Markets, the Economic Outlook, and Monetary Policy" Washington, D.C. (2008-01-10). Retrieved on 2008-06-05.
27. ^ "RealtyTrac Press Release 2008FY". 2009-01-15. Retrieved 2009-02-27. 
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59. ^ "Housing Meltdown". 2008. Retrieved 2008-05-19. 
61. ^ Alan Greenspan (2007-12-12). "WSJ Greenspan-The Roots of the Mortgage Crisis". Retrieved 2009-02-27. 
71. ^ "Banks help undocumented workers own their own home - Aug. 8, 2005". August 8, 2005. Retrieved 2008-10-24. 
73. ^ a b "NPR: Economists Brace for Worsening Subprime Crisis". 2008. Retrieved 2008-05-19. 
75. ^ "Fannie Mae Eases Credit To Aid Mortgage Lending". New York Times. 1999-09-30. 
77. ^ Knox, Noelle (2006-01-17). "43% of first-time home buyers put no money down". USA Today. Retrieved 2008-10-18. 
79. ^ NPR Article "NPR: Economists Brace for Worsening Subprime Crisis". 2008. NPR Article. Retrieved 2008-05-19. 
81. ^ "Bank Systems & Technology". 2008. Retrieved 2008-05-19. 
83. ^ "REALTOR Magazine-Daily News-Are Computers to Blame for Bad Lending?". 2008. Retrieved 2008-05-19. 
85. ^ Tyler Cowen (Published: January 13, 2008). "So We Thought. But Then Again . . . - New York Times". Retrieved 2008-10-26. 
91. ^ Lewis, Holden (18 April 2007). " 'Moral hazard ' helps shape mortgage mess". 
97. ^ "Lessons from the Crisis". PIMCO. 2008-11-26. Retrieved 2009-02-27. 
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