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.