The Supreme Mortgage Crisis, or “mortgage mess” or “mortgage meltdown,” was caused by a precipitous rise in home foreclosures that started in 2006 and pirated out of control in 2007 and 2008. The excessive use of supreme lending during the housing bubble caused an unprecedented foreclosure fallout, the effects of which caused credit markets as well as global and domestic stock markets to face a major financial crisis (Mayer, 2008). The goal of this paper is to address the supreme mortgage crisis, the effects prior to and after the crisis, and discuss who were the biggest players affected by this crisis.
Finally, Team A will provide several concepts learned during the course of this class, which may help ensure that something similar does not happen again in the future. The Housing Market Before and After the Crisis The housing market crash between 2006 and 2007 is considered the worst one in this county’s history. Home ownership rates in the U. S. Had risen from 64% to an all time high of 69. 2% between 1994 and 2004 (Watkins, 2015). By the beginning of 2006, house prices had reached unsustainable levels.
As a result, demand waned and prices fell dramatically by the end of 2006 and through 2007. Prior to the supreme mortgage crisis, the housing market was booming due in large part to new loan instruments advertised by mortgage brokers to make homeownership more affordable. Once prices on homes reached a peak and demand dropped, the housing bubble burst causing new homes sales and construction to waver. By 2012, home prices reached a brand new low, producing a new credit crisis that tends to be labeled as the primary cause Of the recession experienced in the united States in recent years.
In 201 3, The Economist Newspaper of London stated in an article that the American housing market was in recovery, but that home ownership was still rating very low (the lowest since the last quarter of 1995 according the Census Bureau) at 65. 1%. With a current high demand for housing and low possessions, there are fewer homes available to buy or rent in the market. Fewer rental homes are causing rental fees to go up. There is hope that because rental fees are so high today, people will once again be enticed to buy a home in order to make a better investment with their money.
Other Affected Markets The housing finance market was not the only one affected by the Supreme Mortgage Crisis. When the housing bubble burst in late 2006, it uncovered a broader problem in the larger global financial sector. The housing bubble that preceded the collapse of the supreme mortgage market was a direct exult of domestic policies that changed the structure of the mortgage market from “risk-limited to a risk-loving one” (Unmerciful, 2012). Traditional self- amortizing, 30-year fixed rate mortgages securities by Government Sponsored Entities (SSE), Fannies and Friedman, went into decline during that period.
In sharp contrast, during the housing and debt boom Of the sass’s nontraditional mortgages (NET), such as non-amortizing balloon and interest-only mortgage products, as well as supreme loans experienced a substantial increase. Most of these NET were securities in the private- label serialization market. Yachters, 2014). These “toxic assets” were bundled into new financial instruments based on supreme mortgage-backed collateralized debt obligations (COD) (Longboats, 2008), which were purchased by funds and banks (Anderson & Tensions, 2007, Gag. 31).
Eventually, the collapse of the supreme mortgage fueled by the simultaneous collapse of the housing market spilled over into the wider financial market (domestic and international) as well as the stock and bonds market, and finally the employment market. The supreme mortgage crisis soon morphed into a widespread, global financial crisis that brought on a recession affecting real GAP and loss of employment. Who is Responsible and How Did the Crisis occur? The supreme mortgage crisis negatively affected individuals, investors, lenders, and the global economy. There were several groups that were responsible for causing the crisis.
The first were regulators because they lowered risk management regulations required by the banks as well as failed to regulate new derivative investments based on Cods. “The U. S. Inadequately regulated the banks that were to ensure that investors and traders had adequate information to make the right decisions and to prevent fraud and abuse’ (Williston, 2010). In addition, “housing policies were set in place since the early sass… Which produced an unprecedented number of supreme and other neoprene mortgages (known as Alt-AY’ (Williston, 2010). The second group were financial institutions, credit agencies, and insurance companies.
Large insurance companies such as, GIG sold insurance to investors who bought Collateralized Debt Obligations loans that were supported by Wall Street investment banks and were widely sold to investors. These types of investments were called derivative securities. Alga offered insurance policies for Credit Default Swaps (CDC), which were popular with lobar investors. This gave investors the misconception that their investments were secure and if they failed the insurance policies would cover them. Lastly, homeowners who could not pay their mortgages and eventually defaulting on the loans were the ultimate group responsible for the crisis.
Many of these homeowners had been lured to the market with low monthly payments on nontraditional mortgage offers and with hopes of refinancing these loans to more favorable terms before the grace periods ended. However, many of them were not able to do this before the bubble burst and so were underwater because the value of their homes was significantly lower than their mortgage. Many supreme borrowers simply foreclosed on their homes, defaulting on the loans and causing the whole structure of these ‘toxic investments” to collapse. The severe losses associated with these defaults caused weakness Of Bear Stearns and Alga- resulting in their rescue-the failure of Lehman Brothers, the severe recession we are experiencing in the United States today, and ultimately the financial crisis itself’ (Wall son, 2010). Key Sat gasholders Affected The same stakeholders that caused the Supreme Mortgage Crisis were also the major stakeholders most adversely affected by it. These stakeholders were the world central banks, homeowners, lenders, credit-rating agencies, stock, and bond investors.
The effects of the US supreme mortgage crisis on the global banking system was colossal, affecting banks and stock markets around the world. The supreme crisis affected global interest rates causing them to rise and slowing business lending. Before the crisis, interest rates were continuously below 3% from September 2001 to May 2005 – a phenomenon on briefly observed in the previous decade (John, 2009). These lower interest rates promoted short-term borrowing and lured borrowers to enter into adjustable rate mortgages with interest rates lower than those of fixed rate mortgages.
The overabundance of short-term credit caused housing prices to quickly rise as the demand for homes became insatiable. Investors were sold Cods based on supreme loans, which many poorly understood. However, they trusted that these investments were sound because credit rating agencies, such as Moody’s, had issued these investments A to AAA ratings (John, 2009). The nontraditional supreme mortgages extended to homeowners caused many of them to default when they could not afford the payments.
The lending institutions that issued the mortgages also felt the effects of this crisis causing some of the largest ones to collapse in September 2008. Ultimately, confidence in the financial institutions, the credit rating agencies, the mortgage brokerage firms, and the stock and bond markets caused significant losses to these stakeholders as a result of this crisis. (Rona-Task & Hiss, 2010). Concepts Suggested to Prevent a Crisis in the Future and Conclusion Many legislative policies were created that eventually lead to the housing and lending boom that terminated in the supreme mortgage crisis in 2006.
Government measures had relaxed lending criteria in order to reduce discrimination in mortgage lending practices. In this way, people with suboptimal credit histories were able to acquire mortgage loans, sometimes without even showing documentation of wages or employment. Also, the Securities and Exchange Commission reduced minimum cash reserves for five colossal investment banks including Goldman Cash, Lehman Brothers, Merrill Lynch, and Morgan Stanley (Unmerciful, 2012, p. 713). Furthermore, there was a lack of regulation and transparency that heightened the vulnerabilities within the financial markets.
Investors had chased higher returns on investments taking on more risk than they understood. A shadow banking system flourished in the mortgage market carrying out traditional banking functions but in ways loosely linked to the traditional system of regulated depository’ institutions. These shadow banking activities experienced little if any regulation and oversight. All the while, classic panic-like behavior was observed fueling the mistrust and lack of confidence that eventually lead to banks refusing to lend to each other and the public as a whole.
Unlike the run on banks that lead to the Great Depression, the Federal Reserve intervened by injecting large flows of cash into the financial sector in order to assure liquidity in global markets and keep credit flowing to households and businesses in the U. S. Although free unregulated markets are generally good, the Federal Reserve learned that it must increase regulation to promote financial stability. Lastly, the Fed learned through this crisis that management of monetary policy is of utmost importance to avoid future crises (Brenan, 2012, Par 13).
Early analysis of housing data and a quest to understand new investment instruments could have avoided or at least mitigated some of the most adverse effects of this crisis. As is natural for overall economic growth, innovation was at the epicenter of this crisis. The new financial instruments that were synthesized and adapted to create large profits eventually put downward pressure on financial markets and had far reaching consequences that affected industries investing in them.
A vicious cycle ensued where by real corporate investments were made into poorly understood derivatives markets of packaged collateralized debt. Eventually, the losses spilled over onto the real economy when the investors could not liquidate their investments, causing reductions in real GAP and eventually leading to significant unemployment rates further lowering the U. S. And global Gaps. The problem with this debt is that it was propagated across large sections of the financial market, and it was extended to less than worthy borrowers who did not have the means to payoff these loans.
Furthermore, the lack of oversight and prudent monetary policy to counteract some of the activities within the rising shadow banking system encouraged predatory lending to these supreme borrowers eventually leading to the crisis. In the future the federal reserve, thrift banks, and the real-estate market should take lessons learned to maintain low levels of supreme loans without packaging them up and unloading them on the unregulated stock and investment markets as derivatives of derivatives of the debt.
Furthermore, corporate investors should be more vigilant of investments that could affect the solvency and liquidity of their business. In this way, reducing their potential to cut back their workforce, causing large unemployment rates, in order to stay in business. Supreme Mortgage crisis has affected many markets and what markets was effected the most. When Supreme Mortgage crisis occurred, it cause interest rates to rise and caused many housing markets to waver. There were so many people affected by this crisis such as individuals, investors, lenders, and global economy.
In order to prevent another crisis like this happening the Feds had to use the monetary policy. The monetary policy would help with avoiding a crisis that could lead to a Great Depression. Supreme Mortgage crisis had so many negative effects on banks and stock markets. Many of the supreme borrowers foreclosed on their homes and defaulting on their loans. It became impossible to make those payments because of the crisis. Supreme Mortgage was in such a bad place that lenders was not willing to let people borrow.