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69-549: Looking to create a secondary mortgage market dedicated to buying loans from their constituent thrifts, the FHLBanks and board successfully lobbied for the creation of Freddie Mac , instead of an expanded Fannie Mae (which was limited to FHA insured loans ), to be owned and controlled by the FHLBanks and the Federal Home Loan Bank Board and which would buy and sell loans from thrifts only. The FHLBB

138-434: A run on the shadow banking system that began in mid-2007, which adversely affected the functioning of money markets. Examples of vulnerabilities in the private sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as

207-745: A "classic" boom-bust credit cycle was a narrowing of the difference between subprime and prime mortgage interest rates (the "subprime markup") between 2001 and 2007. In addition to considering higher-risk borrowers, lenders had offered progressively riskier loan options and borrowing incentives. In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever. By comparison, China has down payment requirements that exceed 20%, with higher amounts for non-primary residences. To produce more mortgages and more securities, mortgage qualification guidelines became progressively looser. First, "stated income, verified assets" (SIVA) loans replaced proof of income with

276-457: A "statement" of it. Then, "no income, verified assets" (NIVA) loans eliminated proof of employment requirements. Borrowers needed only to show proof of money in their bank accounts. "No Income, No Assets" (NINA) or Ninja loans eliminated the need to prove, or even to state any owned assets. All that was required for a mortgage was a credit score. Types of mortgages became more risky as well. The interest-only adjustable-rate mortgage (ARM) allowed

345-414: A "willful disregard" for a borrower's ability to pay. Nearly 25% of all mortgages made in the first half of 2005 were "interest-only" loans. During the same year, 68% of "option ARM" loans originated by Countrywide Financial and Washington Mutual had low- or no-documentation requirements. At least one study has suggested that the decline in standards was driven by a shift of mortgage securitization from

414-453: A balance, up from 6% in 1970. Free cash used by consumers from home equity extraction doubled from $ 627 billion in 2001 to $ 1,428 billion in 2005 as the housing bubble built, a total of nearly $ 5 trillion over the period. U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $ 10.5 (~$ 14.6 trillion in 2023) trillion. From 2001 to 2007, U.S. mortgage debt almost doubled, and

483-424: A building boom and eventually to a surplus of unsold homes, which caused U.S. housing prices to peak and begin declining in mid-2006. Easy credit, and a belief that house prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages . These mortgages enticed borrowers with a below market interest rate for some predetermined period, followed by market interest rates for

552-819: A long-term trend of rising housing prices had encouraged borrowers to assume risky mortgages in the anticipation that they would be able to quickly refinance at easier terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., borrowers were unable to refinance. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices fell, and adjustable-rate mortgage (ARM) interest rates reset higher. As housing prices fell, global investor demand for mortgage-related securities evaporated. This became apparent by July 2007, when investment bank Bear Stearns announced that two of its hedge funds had imploded. These funds had invested in securities that derived their value from mortgages. When

621-423: A number of years. Causes proposed include the inability of homeowners to make their mortgage payments (due primarily to adjustable-rate mortgages resetting, borrowers overextending, predatory lending , and speculation), overbuilding during the boom period, risky mortgage products, increased power of mortgage originators, high personal and corporate debt levels, financial products that distributed and perhaps concealed

690-533: A number that is believed to have risen to 12 million by November 2008. By September 2010, 23% of all U.S. homes were worth less than the mortgage loan. Borrowers in this situation have an incentive to default on their mortgages as a mortgage is typically nonrecourse debt secured against the property. Economist Stan Leibowitz argued in the Wall Street Journal that although only 12% of homes had negative equity, they comprised 47% of foreclosures during

759-402: A record level of nearly 40% of homes purchased were not intended as primary residences. David Lereah, National Association of Realtors 's chief economist at the time, stated that the 2006 decline in investment buying was expected: "Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market." Housing prices nearly doubled between 2000 and 2006,

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828-438: A tightly controlled duopoly to a competitive market in which mortgage originators held the most sway. The worst mortgage vintage years coincided with the periods during which Government Sponsored Enterprises (specifically Fannie Mae and Freddie Mac) were at their weakest, and mortgage originators and private label securitizers were at their strongest. In a Peabody Award -winning program, NPR correspondents considered why there

897-454: A tool for taking excessive risks. Examples of vulnerabilities in the public sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed " Too big to fail " institutions, monetary policy, and trade deficits. During May 2010, Warren Buffett and Paul Volcker separately described questionable assumptions or judgments underlying

966-672: A vastly different trend from the historical appreciation at roughly the rate of inflation. While homes had not traditionally been treated as investments subject to speculation, this behavior changed during the housing boom. Media widely reported condominiums being purchased while under construction, then being "flipped" (sold) for a profit without the seller ever having lived in them. Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties. One 2017 NBER study argued that real estate investors (i.e., those owning 2+ homes) were more to blame for

1035-494: A year or two of appreciation. As a result of the depreciating housing prices, borrowers' ability to refinance became more difficult. Borrowers who found themselves unable to escape higher monthly payments by refinancing began to default. As more borrowers stopped making their mortgage payments, foreclosures and the supply of homes for sale increased. This placed downward pressure on housing prices, which further lowered homeowners' equity . The decline in mortgage payments also reduced

1104-481: Is down from 83,000 the prior September but well above the 2000–2006 average of 21,000 completed foreclosures per month. Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis. During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words,

1173-883: The American Recovery and Reinvestment Act (ARRA). The collapse of the United States housing bubble and high interest rates led to unprecedented numbers of borrowers missing mortgage repayments and becoming delinquent. This ultimately led to mass foreclosures and the devaluation of housing-related securities . The housing bubble preceding the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies . Despite being highly rated, most of these financial instruments were made up of high-risk subprime mortgages . While elements of

1242-521: The Subprime mortgage crisis . Delinquencies , defaults , and decreased real estate values could make CDOs difficult to evaluate. This happened to BNP Paribas in August, 2007, causing the central banks to intervene with liquidity . This economics -related article is a stub . You can help Misplaced Pages by expanding it . Subprime mortgage crisis The American subprime mortgage crisis

1311-502: The commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions, assuming significant additional financial commitments. The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. Effects on global stock markets due to

1380-470: The shadow banking system . These entities were not subject to the same regulations as depository banking. Further, shadow banks were able to mask the extent of their risk taking from investors and regulators through the use of complex, off-balance sheet derivatives and securitizations. Economist Gary Gorton has referred to the 2007–2008 aspects of the crisis as a " run " on the shadow banking system. The complexity of these off-balance sheet arrangements and

1449-553: The 25.9% drop between 1928 and 1933 when the Great Depression occurred. From September 2008 to September 2012, there were approximately 4 million completed foreclosures in the U.S. As of September 2012, approximately 1.4 million homes, or 3.3% of all homes with a mortgage, were in some stage of foreclosure compared to 1.5 million, or 3.5%, in September 2011. During September 2012, 57,000 homes completed foreclosure; this

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1518-468: The U.S. and European economies. The U.S. entered a deep recession, with nearly 9 million jobs lost during 2008 and 2009, roughly 6% of the workforce. The number of jobs did not return to the December 2007 pre-crisis peak until May 2014. U.S. household net worth declined by nearly $ 13 trillion (20%) from its Q2 2007 pre-crisis peak, recovering by Q4 2012. U.S. housing prices fell nearly 30% on average and

1587-443: The U.S. financial and economic system that contributed to the crisis. These assumptions included: 1) Housing prices would not fall dramatically; 2) Free and open financial markets supported by sophisticated financial engineering would most effectively support market efficiency and stability, directing funds to the most profitable and productive uses; 3) Concepts embedded in mathematics and physics could be directly adapted to markets, in

1656-486: The U.S. stock market fell approximately 50% by early 2009, with stocks regaining their December 2007 level during September 2012. One estimate of lost output and income from the crisis comes to "at least 40% of 2007 gross domestic product ". Europe also continued to struggle with its own economic crisis , with elevated unemployment and severe banking impairments estimated at €940 billion between 2008 and 2012. As of January 2018, U.S. bailout funds had been fully recovered by

1725-440: The amount of mortgage debt per household rose more than 63%, from $ 91,500 to $ 149,500, with essentially stagnant wages. Economist Tyler Cowen explained that the economy was highly dependent on this home equity extraction: "In the 1993–1997 period, home owners extracted an amount of equity from their homes equivalent to 2.3% to 3.8% GDP. By 2005, this figure had increased to 11.5% GDP." This credit and house price explosion led to

1794-738: The boom period. The use of automated loan approvals allowed loans to be made without appropriate review and documentation. In 2007, 40% of all subprime loans resulted from automated underwriting. The chairman of the Mortgage Bankers Association claimed that mortgage brokers, while profiting from the home loan boom, did not do enough to examine whether borrowers could repay. Mortgage fraud by lenders and borrowers increased enormously. The Financial Crisis Inquiry Commission reported in January 2011 that many mortgage lenders took eager borrowers' qualifications on faith, often with

1863-403: The bubble (and declines in the bust) were most pronounced. In these states, investor delinquency rose from around 15% in 2000 to over 35% in 2007 and 2008. Economist Robert Shiller argued that speculative bubbles are fueled by "contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address

1932-412: The bubble. Further, this greater share of income flowing to the top increased the political power of business interests, who used that power to deregulate or limit regulation of the shadow banking system. According to Robert J. Shiller and other economists, housing price increases beyond the general inflation rate are not sustainable in the long term. From the end of World War II to the beginning of

2001-437: The crisis expanded from the housing market to other parts of the economy. Total losses were estimated in the trillions of U.S. dollars globally. While the housing and credit bubbles were growing, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds , also known as

2070-566: The crisis first became more visible during 2007, several major financial institutions collapsed in late 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession. Most notably, Lehman Brothers , a major mortgage lender, declared bankruptcy in September 2008 . There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others. Two proximate causes were

2139-450: The crisis than subprime borrowers: "The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors" and that "credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high-risk [subprime] borrowers was virtually constant for all debt categories during this period." The authors argued that this investor-driven narrative

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2208-405: The crisis were dramatic. Between January 1 and October 11, 2008, owners of stocks in U.S. corporations suffered about $ 8 trillion in losses, as their holdings declined in value from $ 20 trillion to $ 12 trillion. Losses in other countries averaged about 40%. Losses in the stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine. Leaders of

2277-501: The crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels." There are several "narratives" attempting to place the causes of the crisis into context, with overlapping elements. Five such narratives include: Underlying narratives #1-3 is a hypothesis that growing income inequality and wage stagnation encouraged families to increase their household debt to maintain their desired living standard, fueling

2346-725: The federal home loan banks. Secondary mortgage market The secondary mortgage market is the market for the sale of securities or bonds collateralized by the value of mortgage loans . A mortgage lender, commercial bank , or specialized firm will group together many loans (from the "primary mortgage market" ) and sell grouped loans known as collateralized mortgage obligations (CMOs) or mortgage-backed securities (MBS) to investors such as pension funds , insurance companies and hedge funds . Mortgage-backed securities were often combined into collateralized debt obligations (CDOs), which may include other types of debt obligations such as corporate loans. The secondary mortgage market

2415-519: The finance industry's opaque faulty risk pricing methodology. Among the important catalysts of the subprime crisis were the influx of money from the private sector, the banks entering into the mortgage bond market, government policies aimed at expanding homeownership, speculation by many home buyers, and the predatory lending practices of the mortgage lenders, specifically the adjustable-rate mortgage, 2–28 loan , that mortgage lenders sold directly or indirectly via mortgage brokers. On Wall Street and in

2484-596: The financial industry, moral hazard lay at the core of many of the causes. In its "Declaration of the Summit on Financial Markets and the World Economy," dated November 15, 2008, leaders of the Group of 20 cited the following causes: During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of

2553-875: The form of various financial models used to evaluate credit risk; 4) Economic imbalances, such as large trade deficits and low savings rates indicative of over-consumption, were sustainable; and 5) Stronger regulation of the shadow banking system and derivatives markets was not needed. Economists surveyed by the University of Chicago during 2017 rated the factors that caused the crisis in order of importance: 1) Flawed financial sector regulation and supervision; 2) Underestimating risks in financial engineering (e.g., CDOs); 3) Mortgage fraud and bad incentives; 4) Short-term funding decisions and corresponding runs in those markets (e.g., repo); and 5) Credit rating agency failures. The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis

2622-562: The government, when interest on loans is taken into consideration. A total of $ 626B was invested, loaned, or granted due to various bailout measures, while $ 390B had been returned to the Treasury. The Treasury had earned another $ 323B in interest on bailout loans, resulting in an $ 109B profit as of January 2021. The immediate cause of the crisis was the bursting of the United States housing bubble which peaked in approximately 2006. An increase in loan incentives such as easy initial terms and

2691-500: The homeowner to pay only the interest (not principal) of the mortgage during an initial "teaser" period. Even looser was the "payment option" loan, in which the homeowner has the option to make monthly payments that do not even cover the interest for the first two- or three-year initial period of the loan. Nearly one in 10 mortgage borrowers in 2005 and 2006 took out these "option ARM" loans, and an estimated one-third of ARMs originated between 2004 and 2006 had "teaser" rates below 4%. After

2760-572: The housing and credit booms, the number of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in MBS reported significant losses. Defaults and losses on other loan types also increased significantly as

2829-463: The housing bubble in 1997, housing prices in the US remained relatively stable. The bubble was characterized by higher rates of household debt and lower savings rates, slightly higher rates of home ownership, and of course higher housing prices. It was fueled by low interest rates and large inflows of foreign funds that created easy credit conditions. Between 1997 and 2006 (the peak of the housing bubble),

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2898-505: The initial period, monthly payments might double or even triple. The proportion of subprime ARM loans made to people with credit scores high enough to qualify for conventional mortgages with better terms increased from 41% in 2000 to 61% by 2006. In addition, mortgage brokers in some cases received incentives from lenders to offer subprime ARMs even to those with credit ratings that merited a conforming (i.e., non-subprime) loan. Mortgage underwriting standards declined precipitously during

2967-658: The larger developed and emerging nations met in November 2008 and March 2009 to formulate strategies for addressing the crisis. A variety of solutions have been proposed by government officials, central bankers, economists, and business executives. In the U.S., the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010 to address some of the causes of the crisis. The crisis can be attributed to several factors, which emerged over

3036-516: The loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses. The losses experienced by financial institutions on their mortgage-related securities impacted their ability to lend, slowing economic activity. Interbank lending dried-up initially and then loans to non-financial firms were affected. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in

3105-446: The price of the typical American house increased by 124%. Many research articles confirmed the timeline of the U.S. housing bubble (emerged in 2002 and collapsed in 2006–2007) before the collapse of the subprime mortgage industry. From 1980 to 2001, the ratio of median home prices to median household income (a measure of ability to buy a house) fluctuated from 2.9 to 3.1. In 2004 it rose to 4.0, and by 2006 it hit 4.6. The housing bubble

3174-550: The psychology that fuels them, they're going to keep forming." Keynesian economist Hyman Minsky described how speculative borrowing contributed to rising debt and an eventual collapse of asset values. Warren Buffett testified to the Financial Crisis Inquiry Commission : "There was the greatest bubble I've ever seen in my life...The entire American public eventually was caught up in a belief that housing prices could not fall dramatically." In

3243-465: The remainder of the mortgage's term. The US home ownership rate increased from 64% in 1994 (about where it had been since 1980) to an all-time high of 69.2% in 2004. Subprime lending was a major contributor to this increase in home ownership rates and in the overall demand for housing, which drove prices higher. Borrowers who would not be able to make the higher payments once the initial grace period ended, were planning to refinance their mortgages after

3312-439: The rise in subprime lending and the increase in housing speculation. Investors, even those with "prime", or low-risk, credit ratings, were much more likely to default than non-investors when prices fell. These changes were part of a broader trend of lowered lending standards and higher-risk mortgage products, which contributed to U.S. households becoming increasingly indebted. The crisis had severe, long-lasting consequences for

3381-629: The risk of mortgage default, monetary and housing policies that encouraged risk-taking and more debt, international trade imbalances , and inappropriate government regulation. Excessive consumer housing debt was in turn caused by the mortgage-backed security , credit default swap , and collateralized debt obligation sub-sectors of the finance industry , which were offering irrationally low interest rates and irrationally high levels of approval to subprime mortgage consumers due in part to faulty financial models. Debt consumers were acting in their rational self-interest, because they were unable to audit

3450-487: The risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account

3519-409: The second half of 2008. He concluded that the extent of equity in the home was the key factor in foreclosure, rather than the type of loan, credit worthiness of the borrower, or ability to pay. Increasing foreclosure rates increases the inventory of houses offered for sale. The number of new homes sold in 2007 was 26.4% less than in the preceding year. By January 2008, the inventory of unsold new homes

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3588-520: The securities held, as well as the interconnection between larger financial institutions, made it virtually impossible to re-organize them via bankruptcy, which contributed to the need for government bailouts. Some experts believe these shadow institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations. These institutions as well as certain regulated banks had also assumed significant debt burdens while providing

3657-481: The systemic ramifications of domestic regulatory actions. Federal Reserve Chair Ben Bernanke testified in September 2010 regarding the causes of the crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off the crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and supervision) that amplified the shocks. Examples of triggers included: losses on subprime mortgage securities that began in 2007 and

3726-552: The value of mortgage-backed securities, which eroded the net worth and financial health of banks. This vicious cycle was at the heart of the crisis. By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. This major and unexpected decline in house prices means that many borrowers have zero or negative equity in their homes, meaning their homes were worth less than their mortgages. As of March 2008, an estimated 8.8 million borrowers – 10.8% of all homeowners – had negative equity in their homes,

3795-478: The value of these securities dropped, investors demanded that these hedge funds provide additional collateral. This created a cascade of selling in these securities, which lowered their value further. Economist Mark Zandi wrote that this 2007 event was "arguably the proximate catalyst" for the financial market disruption that followed. Several other factors set the stage for the rise and fall of housing prices, and related securities widely held by financial firms. In

3864-635: The years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers. Lending standards deteriorated particularly between 2004 and 2007, as the government-sponsored enterprise (GSE) mortgage market share (i.e. the share of Fannie Mae and Freddie Mac , which specialized in conventional, conforming , non-subprime mortgages) declined and private securitizers share grew, rising to more than half of mortgage securitizations. Subprime mortgages grew from 5% of total originations ($ 35 billion) in 1994, to 20% ($ 600 billion) in 2006. Another indicator of

3933-522: The years leading up to the crisis, the U.S. received large amounts of foreign money from fast-growing economies in Asia and oil-producing/exporting countries. This inflow of funds combined with low U.S. interest rates from 2002 to 2004 contributed to easy credit conditions, which fueled both housing and credit bubbles . Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load. As part of

4002-458: Was 127% at the end of 2007, versus 77% in 1990. While housing prices were increasing, consumers were saving less and both borrowing and spending more. Household debt grew from $ 705 billion at year end 1974, 60% of disposable personal income, to $ 7.4 trillion at yearend 2000, and finally to $ 14.5 trillion in midyear 2008, 134% of disposable personal income. During 2008, the typical US household owned 13 credit cards, with 40% of households carrying

4071-648: Was 9.8 times the December 2007 sales volume, the highest value of this ratio since 1981. Furthermore, nearly four million existing homes were for sale, of which roughly 2.2 million were vacant. This overhang of unsold homes lowered house prices. As prices declined, more homeowners were at risk of default or foreclosure. House prices are expected to continue declining until this inventory of unsold homes (an instance of excess supply) declines to normal levels. A report in January 2011 stated that U.S. home values dropped by 26% from their peak in June 2006 to November 2010, more than

4140-507: Was a market for low-quality private label securitizations. They argued that a "Giant Pool of Money" (represented by $ 70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income-generating investments had not grown as quickly. Investment banks on Wall Street answered this demand with financial innovation such as

4209-486: Was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis . The crisis led to a severe economic recession , with millions losing their jobs and many businesses going bankrupt . The U.S. government intervened with a series of measures to stabilize the financial system, including the Troubled Asset Relief Program (TARP) and

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4278-504: Was abolished and its functions and components assigned to the Federal Home Loan Bank Administration (FHLBA) in the newly established National Housing Agency , by EO 9070, February 24, 1942. FHLBA was abolished and its functions and components assigned to Home Loan Bank Board (HLBB) in the newly created Housing and Home Finance Agency , by Reorganization Plan No. 3 of 1947, effective July 27, 1947. HLBB

4347-524: Was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for

4416-689: Was established as an independent agency by the Federal Home Loan Bank Act , July 22, 1932. The Home Owners' Loan Corporation was established as an emergency agency under FHLBB supervision by the Home Owners' Loan Act of 1933, June 13, 1933. FHLBB and its components (Federal Home Loan Bank System, Federal Savings and Loan System, Federal Savings and Loan Insurance Corporation , and Home Owners' Loan Corporation) were made part of newly established Federal Loan Agency by Reorganization Plan No. I of 1939 , effective July 1, 1939. FHLBB

4485-487: Was greatly reduced by this aggregation process, such that even high-risk individual loans could be treated as part of an AAA-risk (safest possible) investment. On the other hand, mortgage securitization undid "the connection between borrowers and lenders", such that mortgage originators no longer had a direct incentive to make sure the borrower could pay the loan. While historically in the US, fewer than 2% of people lost their homes to foreclosure; rates were far higher during

4554-410: Was intended to provide a new source of capital for the market when the traditional source in one market—such as a Savings and loan association (S&L) or "thrift" in the United States —was unable to. It also was hoped to be more efficient than the old localized market for funds which might have a shortage or surplus depending on the location. In theory, the risk of default on individual loans

4623-711: Was made an independent agency and redesignated as the FHLBB by the Housing Amendments of 1955 (69  Stat.   640 ), August 11, 1955. This redesignated FHLBB was abolished effective October 8, 1989, by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The Office of Thrift Supervision would regulate the thrift industry, while the Federal Housing Finance Board would manage

4692-631: Was more accurate than blaming the crisis on lower-income, subprime borrowers. A 2011 Fed study had a similar finding: "In states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with investors. In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default." The Fed study reported that mortgage originations to investors rose from 25% in 2000 to 45% in 2006, for Arizona, California, Florida, and Nevada overall, where housing price increases during

4761-409: Was more pronounced in coastal areas where the ability to build new housing was restricted by geography or land use restrictions. This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out second mortgages secured by the price appreciation. US household debt as a percentage of annual disposable personal income

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