Mortgage Crisis

The Mortgage Crisis of 2008 was a major part of the Global Economic Crisis of the late 2000s. In fact, many believe that the housing bubble formed in early 2000s lead to the world-wide economic tumult. Numerous factors caused the disruptions in the credit and housing markets, among which were financial speculations, risky mortgage instruments and lending practices, inadequate monetary policies, and inability of borrowers to keep up with their mortgages. Though the economy, and particularly the housing market, is still struggling to get back on its feet, data illustrates several improvements such as decline in foreclosure and delinquent mortgages.

Investment Banking was, undoubtedly, a major vehicle of the boom and bust of housing market. An investment bank, unlike traditional banking, does not lend to or accept deposits from clients. Instead, it act as an broker and/or underwriter assisting corporations, as well as governments and individuals, in financial transactions (e.g. issuing securities, proving consulting services to investors, trading of derivatives, etc.). Because housing market of 2000s was more of a financial, rather than commodity market, and was operated by many intricate fiscal instruments, investment banks (specifically their risk-taking nature) played an important role in its development.

Subprime Mortgage is one of the innovations of banks pursuing policies of predatory lending. These mortgages were given to borrowers whose credit was either nonexistent or so poor, that they would not qualify for a conventional mortgage. Many of the subprime mortgages were Adjustable-Rate Mortgages. Unlike fixed-rate mortgages, the ARM interest rates fluctuate in response to the market interest rates. The rates during the initial payment stages are also generally lower than those on the fixed-rate mortgages. Such accommodating mortgages clearly pose the risk of a default because at some point the borrower, given his already unstable situation, will not be able to pay off his mortgage. Many borrowers counted on refinancing to deal with the principal repayment and the increasing monthly payments. However, when refinancing didn't happen, most borrowers defaulted.

Credit Default Swaps, like other financial derivatives, are used to hedge risks. CDS allows the transfer of the third party credit risk from one party to the other. One party in the s a lender and faces credit risk from a third party; the counterparty in the credit default swap agrees to insure this risk in exchange of regular payments.

Collateralized Debt Obligations is another banking innovation which essentially distributes credit risk to numerous investors by selling mortgages. Investors are then paid according to the level of risk they acquired through certain loans backing each CDO (also known as tranches). Consequently, CDO were seen to relax lending standard further.

The Troubled Asset Relief Program (TARP) was implemented in 2008 by the Bush Administration as a part of the Bank Bailout Bill. The $700 billion program essentially established a reverse auction stage where banks could announce bid prices to sell their mortgage-backed securities to the Treasury Department. The main purpose of the program was to increase the liquidity of the secondary mortgage markets by purchasing the MBS, and through that, reducing the potential losses to the institutions which owned them.

Despite the deep shock to the housing market, and its long-lasting consequences, the data shows improvements partly indicated by the changes in foreclosure and delinquent mortgage rates. Foreclosures and delinquencies surged during 2008. In 2009 the country saw widespread losses with a record total 2.82 million homes facing foreclosure. That year bank repossessed a total of 918,000, a 6.5 percent increase over 2008.

Foreclosures were concentrated in particular states. In Nevada, for example, more than 10 percent of homes were in the process of foreclosure in 2009; in Arizona and Florida it was about 6 percent. In California, 632,573 housing units received a foreclosure filing in 2009, or 4.75 percent of all homes. James J. Saccacio, chief executive officer of RealtyTrac said that 2009 numbers “probably would have been worse if not for legislative and industry-related delays in processing delinquent loans.”

As prices continued to fall, 23% of all homes in US were worth less than mortgage loans by September 2010, providing incentive for borrowers to file foreclosure.

2011 saw fewer than 2 million foreclosure filings, that's more than a 30% decrease from 2.9 million in 2010. In March 2012 198,853 foreclosure filings were reported, a 4 percent decrease from February and a 17 percent decrease from March 2011. March’s total was the lowest monthly total since 2008.

Approximately 1.4 million homes, or 3.3% of all homes with a mortgage, were in the national foreclosure inventory as of September 2012 compared to 1.5 million, or 3.5%, in September 2011. From August 2012 to September 2012 the national foreclosure inventory was down 1.1% . California, Arizona, Nevada and Florida were still leading the foreclosure parade with 20 highest foreclosure rates, as of October 2012. Most recently, foreclosure filings were reported on 150,864 U.S. properties in January 2013, a decrease of 7 percent from the previous month and down 28 percent from January 2012.

Though heavy consequences of the crisis are still felt throughout the country, the housing market seems to gain strength and stability. Government and housing industry policies allowing homeowners to pursue refinancing, short sales and loan modifications undoubtedly account for the improvements.  

 Today most of us seem to take money, or rather the concept of its existence, for granted. It's been there since modern human was born, as well as centuries before, and it will likely be there long after. Not many contemplate on how and when money as we know it came into being; it is also unlikely that an average academic program of a compulsory education includes an extensive inquiry into money as a concept. Nevertheless, when asked general questions about money people seem to have abstract ideas about its origin, “character”, and the influence on the human kind.

According to Richard Seaford, the notion of money as a means of exchange first appeared after 5^th century BC, which was also the speculation of most participants. Seaford explains that the “increased importance of money [as well as] survival of more substantial texts” from that period allows for more extensive information than that from earlier time, or even the following century. The “character” of money in that period, however, was substantially different than in modern time. First, money existed in the form of chunks of precious metals, rather than coinage. Second, its initial purpose was accumulation of “wealth” rather than exchange. When asked about the time of origin, most people recalled images of ancient Greek, Roman or Chinese coins seen in history books, museums, or on the TV. Some interpreted “money” as chunks of precious metal, pieces of wood, or other material.

Seaford gives several examples of what characterized money as money for ancient Greeks. First, money represented accumulation of wealth. In a commune which performs exchange of goods (e.g. fsh for potatoes), instead of currency, one may possess abundance of fish (or any other good) but is unlikely to be seen as “wealthy”. When money appears in the form of precious metal, the concept of wealth becomes more defined. Strangely, no participant mentioned wealth as a property that would make an object money. A few, however, talked about money being made out of valuable material, which may represent wealth (they were probably implying precious metal coins, rather that modern paper and copper currency). One characteristic of money noted by every participant is also discussed by Seaford: money as a means of exchange. For a modern person this is probably the most obvious attribute of money: one can get different things in exchange for it. In ancient Greece, however, money was initially used only as a symbol of wealth and status, or for settling feuds.

When asked about place and time where money may not exist, all participants mentioned early communes based on physical competition for and sharing/exchange of necessities, similar to Homeric realm described in “Money and the Early Greek Mind”. Seaford describes these practicec as violence, redistribution, and exchange of things. However seven more ways dealing things among people are defined: prizes, gifts,reward, compensation,ransom, slavery and bride-price (exchange for people).

On the technical side of money, about a half of participants believe that money in its physical presence will soon disappear. Judging by increasing popularity/use of the digital form of currency, bills and coins are believed to become increasingly inconvenient and unnecessary. Still, seven people believe that paper/metal currency provides a form of security and assurance, and will thus remain desirable.

The moral issue of money has probably existed as long as money itself. More often than not money has been describes as a necessary evil, said to breed avarice and acute self-interest. Prevailing number of participant believe that this may be the case. Five people, however, argued that money is merely the tool of achieving personal goals, and that self-interest is an objective concept, thus it is difficult to judge how much of it is evil or immoral.