NAME: SYED SIKANDER HUSSAIN SHAH

COURSE: ECO 607

TOPIC: MORTGAGE CRISIS

STUDENT ID: 024003260
Introduction and Objective:

Traditionally, in 90s it was not that easy for individuals or companies to get a mortgage loan if
one had a bad credit and dont have a stable income. The reason is that the lender just doesnt
want to take the risk that the borrower might default on the lender. But all this changed in 2000s.
During that time investors in the US and abroad looking for low risk and high return investment
started investing in mortgage back securities which were back by thousands of individual
mortgages. Furthermore, credit rating agencies where giving a green flag to mortgage backed
securities as safe investments with AAA rating. At that time investors were interested to buy
more and more of these mortgage backed securities and on the other hand lenders did their best
to created more of it, to do so lender loosen their criteria and made loans available to those
people with low income and poor credit these were called subprime mortgages. At that time
subprime lending practices were brand new for credit agencies which means they could still
point out at historical data which indicated mortgage investment still is a safe investment. But in
reality it was not, they were becoming more and more unsafe but the investors just trusted
blindly on the ratings and kept investing (Fitzgerald, 2013). The new lending requirements and
low rate made the prices of houses looks higher which build even more confidence for the
investors. They thought even if the borrower defaults in their payments they will still have their
houses to sell. But their thinking was wrong, this was like a housing bubble and bubbles have
tendency to burst and this one did. As the borrowers started defaulting, more and more houses
became available to purchase which made the prices of the houses to fall, but there were no
buyers in the market to buy them. Supply was increased but there was no demand even.

As all of this was happening big financial institutes stopped buying these subprime
mortgages and subprime lenders were getting stuck with these bad loans. Starting from 2007,
some really big lenders filled bankruptcy .On September 15, 2008, Lehman brothers which was
the fourth-largest investment bank in the United States filed for the largest bankruptcy in history.
This powerful event had consequences globally and destroyed the US housing market, financial
system and economy. It was the worst recession since great depression of 1930s (Fitzgerald,
2013).

In this paper will provide in detail the devastating long lasting effects of the mortgage crisis on
economy and its after affects to other sectors. And some details of what measures the
government took to overcome such crisis.
Literature review:

This course paper is devoted to revealing some insight into the general writing regarding the
matter of home loan mortgage crisis of 2007 - 2008 and the part of the Government in it to
overcome it and the issuance of the TARP regarding this home loan crisis emergency. The
primary segment of this paper looks at important elements and impacts on budgetary
emergencies on the large scale level. The second part will look at the exact writing so far on the
continuous emergency and the measures taken by the Federal Reserve in Coping with such
Crisis.

Analysis:

As the subprime Mortgage market swelled, so did the Housing bubble blast. Amid the blast, an
ever increasing number of houses were assembled particularly in places with expensive house
costs like California and Massachusetts. People additionally purchased effectively existing
houses and redesigned them to expand the value to offer later. A few people, who were sure that
the boom could never end, purchased a house that they just intended to live in for two or three
years before offering it. This movement in the mortgage market caused house costs to swell
significantly further and persuaded that by not entering the lodging market, they were feeling the
loss of a brilliant open door. This model was supportable if house costs ceaselessly climbed, yet
that relied upon request being higher than supply. Expanding abandonment rates toward the
finish of 2006 and start of 2007 would turn around the part of free market activity in the housing
market.

Dispossessions in California amid by the subprime mortgage crisis rose to 85 percent. This was
a pattern that started to clear the nation in 2007. The subprime contract showcase started to
implode, for the most part driven by the lapse of secret rates set by customizable rate contracts.
Subprime borrowers were currently paying a significantly higher rate of enthusiasm on their
home loans, now and again with practically zero cautioning (Doerer, 2015). Rushes of
abandonments immediately affected the housing market since more houses were set up deal
along these lines expanding supply.

The expansion in supply in the housing market made the costs of houses fall. This was
impeding to the market in light of the fact that many individuals' interests in the housing market
relied upon the development of the market (Doerer, 2015).. The estimation of people groups'
homes diminished drastically. Somebody who took a home loan out on a house worth $300,000
in 2006 could just offer that same house for $90,000 the next year. Many individuals did not see
the point in paying more than a house was worth so intentionally made default in their home
loans. This made more houses go out available for sale, additionally expanding supply and
dropping the cost of homes even lower. The housing market had formally slammed.

The mortgage market crash effectively affected the money related framework. The main
foundations to be influenced were home advance originators. Countrywide Financial was the
biggest originator of subprime home loans and one of the primary prominent losses of the crisis.
Countywide detailed record benefits toward the finish of 2006, later, it was purchased by Bank
of America (McDomald & Paulson, 2015). Countrywide had an excessive number of subprime
contracts that defaulted on its books toward the finish of 2007 and hence was headed to
budgetary fall.

The crash of the mortgage market additionally devastatingly affected insurance

agencies, particularly AIG who was the greatest guarantor of protection of subprime contracts.
AIG guaranteed subprime contracts by the method for credit default swaps. Credit default swaps
were assurances by insurance agencies to pay the obligation on defaults if they somehow
managed to happen as an end-result of the month to month premiums (McDomald & Paulson,
2015). Default rates ran widespread, and AIG couldn't stand to pay off the credit default swaps.
This heightened the issue in light of the fact that AIG, being the biggest safety net provider in the
nation was instrumental to different parts of the money related framework. AIG's fall would have
expansive outcomes to the economy everywhere and hence, the U.S. government arranged a
bailout, yet it would not be the last; speculation banks were next.

Much like Countrywide, Lehman Brothers announced record benefits towards the finish
of 2006 at the same time, as Countrywide large portions of these benefits were as subordinates
obtained from the subprime mortgage market. Lehman Brothers, in the same way as other Wall
Street banks obtained 40 dollars for each genuine dollar they needed to purchase more subprime
home loans to offer later. At the point when subprime mortgage sponsored resources were
considered useless, Lehman Brothers started to fall. Lehman's disappointment and its
consequences for the budgetary framework were fallen to the point that the point of reference for
government mediation was set (EveryCRSreport.com, 2010). Starting now and into the
foreseeable future the administration would mediate in the emergency straightforwardly by
ransoming banks who were esteemed too enormous to fall flat. The impacts of bank
disappointments, government intercession and the mortgage market crash would overflow to
whatever remains of the economy going ahead.

The crash of the mortgage market put the economy in danger. To attempt and relieve
the harm in the mortgage market, the Federal Reserve brought financing costs down to zero
percent. This activity had impacts on different markets that rely upon credit like the auto advance
credit market and understudy advance credit showcase. Loaning organizations that were not
included in the mortgage market at all were currently influenced. This strain on the credit market
made significant withdrawals in the economy which multiplied the unemployment rate toward
the finish of 2007 (EveryCRSreport.com, 2010). Right up 'til the present time, the Federal
Reserve has not brought loan fees up in dread of harming the economy

On October 3, 2008, to beat this crisis Government presents The Troubled Asset Relief Program
(TARP) which was $700 billion bailout program for major financial institutes of US. Congress
approved it through the Emergency Economic Stabilization Act of 2008. It permitted the U.S.
Bureau of the Treasury to implant money into the country's banks to keep them working (Corner,
2013). Congress affirmed $350 billion for use in 2008. President Obama decided to not utilize
the rest of the $350 billion. Canvas lapsed on October 3, 2010.
Under Protection Act (Dodd-Frank Act) the accompanying sums were conferred through TARP's
five program ranges:

Around $250 billion was conferred in projects to settle keeping money foundation.

Around $27 billion was conferred through projects to restart credit markets.

Around $82 billion was focused on balancing out the U.S. vehicle industry ($2 billion of which
was at last scratched off).

Around $70 billion was focused on balancing out American International Group (AIG) ($2
billion of which was eventually scratched off).

Around $46 billion was conferred for projects to enable battling families to stay away from
abandonment, with these uses being set aside a few minutes.

The specialist to make new money related responsibilities under TARP

October 3, 2010. As of October 31, 2016, aggregate accumulations under TARP, together with
Treasury's extra continues from the offer of non-TARP offers of AIG, surpass add up to
distributions by more than $7.9 billion (Corner, 2013). Treasury is presently going down its
outstanding TARP speculations and is additionally proceeding to execute TARP activities to
enable battling property holders to maintain a strategic distance from abandonment. (ref 5)

The administration interceded in the emergency toward the finish of 2008 by

purchasing troubled assets. Covering was subsidized by citizens and in complete cost 60 billion
dollars. Covering was instituted to reestablish trust in the commercial center and to ease the
credit showcases yet to the citizen it was a bailout to Wall Street Without TARP, Morgan
Stanley, Bank of American (who purchased Countrywide) Merrill Lynch, and Goldman Sachs
would have gone tummy up making significantly more disturbances in the economy (Jensen,
2012). Canvas prevailing with regards to relieving the calamity in any case and set the point of
reference for another assessment supported program to help recuperate the economy in the long
run.
Summary and Conclusion:

Before the finish of 2008, the harm of the subprime mortgage crisis was felt all through the
nation, the economy was in its more awful state since the Great Depression. In 2009 President
Barack Obama marked the American Recovery and Reinvestment Act, a jolt bundle of 800
billion dollars, intended to accelerate the economy. Some would contend that the jolt fizzled on
the grounds that it didn't accelerate the economy to pre-emergency levels, while others contend
that it was a resonating achievement since it kept the emergency from turning into despondency.
The jolt bundle remains a disputable choice and one that influences both the financial and
political scene of today.

The impacts of the subprime mortgage crisis and the monetary retreat are still felt today. Political
occasions today, for example, Brexit and the race of Donald Trump are outcomes of the crisis.
The events of the crisis, like other economic crisis in history, have altered the course of history
in a fundamental way. The pessimism of government, companies, and media have all been filled
by the crisis somehow or another. The annihilation of the mortgage market, budgetary
framework, and economy by the method for the subprime mortgage crisis will keep on shaping
the fate of the United States for quite a long time to come.
 LIST OF REFERENCES:

Corner, G. S. (2013, April). The Troubled Asset Relief ProgramFive Years Later. Retrieved
July 02, 2017, from https://www.stlouisfed.org/publications/central-banker/fall-2013/the-
troubled-asset-relief-programfive-years-later

Doerer, K. (2015, September 02). The U.S. foreclosure crisis was not just a subprime event.
Retrieved June 28, 2017, from http://www.pbs.org/newshour/making-sense/u-s-foreclosure-
crisis-just-subprime-event/

Fitzgerald, A. (2014, May 19). Ex-Wall Street chieftains living large in post-meltdown world.
Retrieved July 02, 2017, from https://www.publicintegrity.org/2013/09/10/13326/ex-wall-street-
chieftains-living-large-post-meltdown-world

Jensen, B. (2012, July 31). National Debt-Inflation Crisis. Retrieved June 28, 2017, from
http://faculty.trinity.edu/rjensen/2008Bailout.htm

McDonald, R., & Paulson, A. (2015, August 3). What Went Wrong at AIG? Retrieved July 02,
2017, from https://insight.kellogg.northwestern.edu/article/what-went-wrong-at-aig

The Global Financial Crisis: Analysis and Policy Implications. (2010, February 04). Retrieved
July 02, 2017, from https://www.everycrsreport.com/reports/RL34742.html