Housing Collapse Paper
The housing crisis was the primary cause of the financial turmoil of 2008. Institutional weaknesses are to blame for the housing collapse. In this backdrop, this paper analyzes the triggers of the housing collapse.
The Sharp Elevation of Housing Prices
Loose lending standards are the primary reason for the sharp escalation in housing prices in the period between 2002 and 2005. Government policies from the 1980s, which purposed to expand homeownership to a significant portion of the US populace, encouraged reckless and greedy lending practices among financial institutions and mortgage originators (Strumeyer, 2017). By the 1990s, excessive real estate risk-taking became increasingly popular. Bankers extended credit facilities to less-than-prime borrowers without adequate paperwork (Strumeyer, 2017). As a result, the increase in mortgages and credit caused an escalation in the price of houses. The loosened lending practices enabled individuals who would otherwise not qualify for loans to have the financial muscle to purchase homes.
Causes of the Rapid Increase in Mortgage Default Rate
In particular, the rate of mortgage defaults increased sharply between 2006 and 2007 because of a rapid fall in housing prices, which fuelled an increase in interest rates. Previously, mortgage lenders banked on the idea that if borrowers defaulted, they could sell the houses at high prices to recoup the loans (Jones & Sirmans, 2019). However, with the fall in housing prices, mortgage lenders had to increase the interest rate of loans. The elevation of loan interests caused a situation where borrowers could not afford the high-interest rates, leading to an increase in default rates. . Don't use plagiarised sources.Get your custom essay just from $11/page
Impact of the Community Reinvestment Act on the Housing Crisis
Notably, the Community Reinvestment Act (CRA) contributed to the housing collapse. The act encouraged financial institutions to extend credit to borrowers from all clusters of society, inclusive of low and middle-income individuals (Mambretti & Garcia, 2019). As a result, banks offered credit to persons who were more susceptible to defaulting (Thoma, 2017). This outcome confirms that the CRA fuelled the housing collapse.
In conclusion, the housing bubble had detrimental effects on US financial institutions and the economy. Relaxed lending standards encouraged banks to extend credit to borrowers with a significant risk of defaulting. Consequently, the increase in the supply of mortgages and credit caused the heightening of housing prices.
References
Jones, T., & Sirmans, G. S. (2019). Understanding subprime mortgage default. Journal of Real Estate Literature, 27(1), 27-52.
Mambretti, S., & Garcia, J. L. (2019). The sustainable city XIII. Southampton, England: WIT Press.
Strumeyer, G. (2017). The capital markets: Evolution of the financial ecosystem. New York, NY: John Wiley & Sons.
Thoma, M. (2017, January 10). Here’s what really caused the housing crisis. Retrieved from https://www.cbsnews.com/news/heres-what-really-caused-housing-crisis/