Economics Study Set 18

Business

Quiz 33 :
the Crisis of 2008: Causes and Lessons for the Future

Quiz 33 :
the Crisis of 2008: Causes and Lessons for the Future

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Why did housing prices rise rapidly during 2002-2005? Why did the mortgage default rate increase so sharply during 2006 and 2007 even before the 2008-2009 recession began?
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The economic crisis of 2008 was one of the biggest downturn the US economy faced after the great depression. The experts have pointed out many reasons for the crisis among which the most important was the subprime mortgage crisis that leads to the bankruptcy of many financial institution that forced the economy into deep recession.
At the beginning of the twenty first century the US federal government took the policy to promote home ownership to those with income below median. The government forced various financial institutions to extend more loans to those with low and medium income. Many financial institutions offered the loan at lower down payment and without proper scrutiny of the borrower. The easy available loans and the federal government policy rises the demand for the housing resulted in the rising housing prices in 2001 to 2005.
To mandate the government policy HUD forced the two GSE financial institution to offer loans to low and middle income people. These tow institution also bought many mortgages from other financial institutions. Knowing that the risk of the loan can be passed on to these institutions the banks made subprime mortgage loans to many borrowers. The HUD policy also mandates the institution to lower their down payment so that many people with relative lower income can have access to homes. On the other hand, the Fed expansionary monetary policy kept interest rate at historically low levels. This increases the attractiveness of the adjustable rate mortgages. All of these factors increase the demand for housing and their prices. Increasing number of subprime loans put an upward pressure to the default rate. Also the ARM loans interest rate reset and increases the monthly payment. These two factors force the borrower to default on their loans and thus the house price began to fall at the end of 2006.

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What happened to the credit standards (e.g., minimum down payment, mortgage loan relative to the value of the house, and creditworthiness of the borrower) between 1995 and 2005? Why did the credit standards change? How did this influence the housing price bubble and later the default and foreclosure rates?
Free
Essay
Answer:

Answer:

The economic crisis of 2008 was one of the biggest downturn the US economy faced after the great depression. The experts have pointed out many reasons for the crisis among which the most important was the subprime mortgage crisis that leads to the bankruptcy of many financial institution that forced the economy into deep recession.
At the beginning of the twenty first century the US federal government took the policy to promote home ownership to those with income below median. The government forced various financial institutions to extend more loans to those with low and medium income. Many financial institutions offered the loan at lower down payment and without proper scrutiny of the borrower. The easy available loans and the federal government policy rises the demand for the housing resulted in the rising housing prices in 2001 to 2005.
To mandate the government policy HUD forced the two GSE financial institution to offer loans to low and middle income people. These tow institution also bought many mortgages from other financial institutions. Knowing that the risk of the loan can be passed on to these institutions the banks made subprime mortgage loans to many borrowers. The HUD policy also mandates the institution to lower their down payment so that many people with relative lower income can have access to homes. On the other hand, the Fed expansionary monetary policy kept interest rate at historically low levels. This increases the attractiveness of the adjustable rate mortgages. All this things decreases the credit standards between 1995 and 2005.
All of these factors increase the demand for housing and their prices. Increasing number of subprime loans put an upward pressure to the default rate. Also the ARM loans interest rate reset and increases the monthly payment. These two factors force the borrower to default on their loans and thus the house price began to fall at the end of 2006.

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If owners have little or no equity in their houses, how will this influence the likelihood that they will default on their mortgage? Why?
Free
Essay
Answer:

Answer:

The economic crisis of 2008 was one of the biggest downturn the US economy faced after the great depression. The experts have pointed out many reasons for the crisis among which the most important was the subprime mortgage crisis that leads to the bankruptcy of many financial institution that forced the economy into deep recession.
At the beginning of the twenty first century the US federal government took the policy to promote home ownership to those with income below median. The government forced various financial institutions to extend more loans to those with low and medium income. Many financial institutions offered the loan at lower down payment and without proper scrutiny of the borrower. The easy available loans and the federal government policy rises the demand for the housing resulted in the rising housing prices in 2001 to 2005.
To mandate the government policy HUD forced the two GSE financial institution to offer loans to low and middle income people. These two institutions also bought many mortgages from other financial institutions. Knowing that the risk of the loan can be passed on to these institutions the banks made subprime mortgage loans to many borrowers. The HUD policy also mandates the institution to lower their down payment so that many people with relative lower income can have access to homes.
The equity loan works as mortgage for those who do not have capital asset. The equity loan enables the borrower to borrow against the equity. Thus, if the person defaults on the loan he will lose the equity. At the time of falling housing price and soaring ARM, the outstanding loan exceeded the value of the property. The borrower with little or no equity loan had very little to lose and it was unprofitable for them to pay for the loan. Thus, it was easy for them to simply walked away of the home.

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When did mortgage default and housing foreclosure rates begin to rise rapidly? When did the economy go into recession? Was there a causal relationship between the two? Discuss.
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When mortgage originators sell mortgages to Fannie Mae, Freddie Mac, and investment banks the originators have no additional liability for possible default by the borrower. How will this arrangement influence the incentive of the originators to scrutinize the creditworthiness of the borrower? Would the incentive structure be different if the originator planned to hold the mortgage until it was paid off? Why or why not?
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Some charge that the Crisis of 2008 was caused by the "greed" of Wall Street firms and other bankers. Do you agree with this view? Do you think there was more greed on Wall Street in the first five years of this century than during the 1980s and 1990s? Why or why not?
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