Real Estate Bubble

What Was The Mortgage Crisis?

The mortgage crisis started in 2007 and rattled the U.S. economy. It sent shock waves around the world as people began to worry if we would ever recover from this disaster. Most adults are well aware of the mortgage crisis and of its lasting affect on the economy. However, not many people know even the basics about what happened.

What Went Down? To figure out what happened with the mortgage crisis we have to take a step back. Prior to the 2007 crash, there was the technology bubble that popped as we moved to the new millennium. The economy slipped into a recession in 2001 coupled with the 9/11 terrorists attacks. Governments around the world feared a lengthy recession was on the horizon because of these events.

In an attempt to stimulate the economy, central banks began to lower interest rates to encourage borrowing. However, as interest rates on things like auto loans and mortgage were lower; rates also lowered for areas of savings like CDs and bank accounts.

No longer were savers getting an acceptable return in safe accounts like savings accounts or CDs. They began to look elsewhere for perceived safety and a bit of return. In the order to receive a better return, they had to take on more risk. One area that people moved was to the real estate market.

Mortgage lenders also began to become lenient with their lending guidelines. As the 2000’s moved along, riskier loans began to become commonplace with the likes of subprime mortgages and no income/no asset verification loans. If you had a pulse, it seemed that some mortgage broker could find a loan for you no matter your financial situation.

Banks no longer needed to keep mortgages in house. They could sell them on the secondary market. The mortgages were packaged up and sold to investors who took on the risk of loans. Since lenders no longer had a direct risk for these loan, they became sloppy and careless with their lending guidelines. The mortgage lenders became more concerned about quantity over quality as there was big money to be made pushing good and increasingly bad mortgages to the secondary market or Wall Street.

Because of demand for real estate, home prices increased rapidly. Many people thought the quick way to become rich was through accumulating real estate and then hopefully selling it later as the market continued to increase. It was no big deal if you eventually couldn’t make your payment because you could just sell the property once you got into trouble and make a profit. This was the theory, anyway. Many people got stuck with a bunch of real estate they couldn’t afford, which eventually foreclosed.

Home builders added fuel to the fire by responding to the demand of real estate. They created  enormous developments to the point where several markets were over-saturated. Many home builders did not survive as the real estate market collapsed.

People had the belief that the housing market could not and would not decrease. However, past performance is never a signal of future performance. As the market actually did crash, many people were blindsided and all came crumbling down.

Their were a few people who had the foresight to see the real estate bubble. Some of these people like Michael Burry made a fortune predicting the collapse as documented in the movie/book titled The Big Short.

The above is the general idea behind the mortgage crisis. There clearly is more indepth reasons into the lead up and collapse. We will dig a little deeper into this and other potentially looming disasters as we move a long here at Financial Crisis Aftermath.

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