1. Why did housing prices rise rapidly during 2002-2005? Why did the mortgage de
ID: 2505488 • Letter: 1
Question
1. 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?
2. 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 this influence the hosing price bubble and later the default and foreclosure rates?
4. 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.
6. Some charge that the Crisis of 2008 was caused by the
Explanation / Answer
Why did housing prices rise so rapidly during 2002-2005? Why did the mortgage default rate increase so sharply during 2006 and 2007 even before the 2008-2009 recession began?
Low down payment requirements, and the Fedslow interest policy of 20022004 resulted in the rapid growth of both subprime and ARM loans during the first five years of this century. The initial effects were positive, but the long-term effects were disastrous.
The increasing share of subprime loans began to push default rates upward. The low short-term interest rates that made adjustable rate mortgages attractive during 2004 soon reversed and led to higher monthly payments as the interest rates on ARM loans were reset in the years immediately ahead. As these two factors converged in the latter half of 2006, they generated falling housing prices and soaring mortgage default and foreclosure rates
. The housing and lending crisis soon spread to other sectors and economies around the world, turmoil was created in global financial markets.
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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?
There were mandates and regulations on imposed banks, which forced lenders to reduce their lending standards, extend mortgages to subprime borrowers, and reduce down payment requirements. The lower rates made it more attractive to buyers, where one who normally could not afford such can. This was great at first but once the interest rate climbed drastically it was impossible to balance.
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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. Housing prices began to decline during the second half of 2006, and mortgage defaults and housing foreclosures started to increase. As the housing bust spread to other sectors, stock prices plunged, major investment banks experienced financial troubles, unemployment increased sharply, and by 2008 the economy was in a severe recession.
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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?
I completely agree with this view. It was Wall Street who gave money to the banks. Over the years, mortgage lenders were happy to lend money to people who couldnt afford their mortgages. But they did it anyway because there was nothing to lose. These lenders were able to charge higher interest rates and make more money on sub-prime loans.
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