The US Sub-Prime Mortgage Crisis

The Sub-Prime Mortgage Crisis of 2008 has been the largest financial crisis to take place since the end of the Great Depression. It was the actions of individuals and companies that caused this crisis. For although it could have been adverted, too much money was being made by too many people in place of authority to think deeply on the situation. As such, by the time actions were taken to attempt to rectify the situation, it was already too late. Trillions of dollar of tax payers’ money was spent trying to repair the situation that was caused by the breakdown of ethics and accountability in the private sector. And despite the government’s actions to attempt to contain the crisis, hundreds of thousands lives were negatively

The Great recession in 2008 was the worst recession since the Great Depression. The bursting of an eight trillion dollar housing bubble started it but at the same time lead to a loss in business investment. It was also caused by a stock market crash and bad loan that caused many people to lose some of their family wealth dramatically. The Great Depression had a four percent fall in domestic gross product and the unemployment rose to ten percent. The Great Recession also leads to the largest expansion and a two-thirds tax cut.

The Great Recession was financial down turn that happened from 2007-2009, largely because of the housing market decline. The term recession refers to any significant decline in an economy that lasts longer that a few months. Its beginning can be signified by two consecutive negative quarters of economic growth. The great Recession caused many areas of the economy to struggle, one of the biggest was the unemployment rate. In December of 2007 the unemployment rate was 5%. From that point this number grew until it had reached 10% in October of 2010. Due to the unemployment rates steady rise, the national output decreased.

Today million are still jobless with an unemployment rate at 9.7%, credit is tight, and businesses are slowly building back up. The sub-prime financial crisis of 2007 and 2008 financially destroyed the lives of many, but how could this have happened?

The great depression in the 1930s had destroyed the United States economy, and devastated the mortgage industry intensively. Most people lost jobs, money, and default their loans. Equally, financial institutions suffered in major financial losses, and closed out their businesses. To revive the economy, and stimulate the mortgage industry, the Federal National Association (Fannie Mae) was created to insure, and buying most of mortgage loans (Mishkin & Eakins, 2012). As the timely manner, the Federal Housing Administration (FHA) was also established to insure certain mortgage loans in a goal of spurring mortgage demands (Mishkin & Eakins, 2012). The establishment of the two housing agencies has created the

The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play

The U.S. subprime mortgage crisis was a catastrophe affecting both real and financial sectors of the global economy. It was estimated that 2.5 million borrowers had lost their homes due to foreclosures from 2007 to 2009 and whilst another 5.7 million homeowners were at pending risk of foreclosure in the aftermath of the crisis (Williams, 2012). The failures and bailed out of large banking and financial institutions in the US, the UK, Europe and others such as Bear Sterns, Lehman Brothers, Northern Rock, AIG, Freddie Mac, Fannie Mae and etc. including the major collapsed of Iceland’s systemic banking, characterised as one of the largest experienced by any country in economic history, is an emblematic of the excessive and imprudent lending

The mid-1990s saw an economic revival. What incited this activity was a technology boom like no other. It created a new era of electronics and computing. There were cell phones, desktop and laptop computers, the Internet, electronic games, flat panel TVs and major advances in business software and efficiencies. The housing industry was a big benefactor of this new economy. Home prices began to rise again by 1996. The rate of home ownership during the 1970s, 1980s and the first half of the 1990s averaged 64.4 percent. The rate began to rise in 1995, peaking at 69.2 percent in 2004. New housing rebounded. The economic turnaround brought California -- hit especially hard by the last

During the housing boom, the subprime mortgage market enhanced the revenues of lenders, investment bankers and investors alike. While some knew the trend would come to an end many did not. When the housing bubble burst and home prices declined the effect on those involved was enormous, financial institutions who originally had low debt to equity ratios, soon found themselves on the cusp of bankruptcy.

What role did the Accounting profession play in the recent sub prime mortgage crisis? What could they have done differently?

This is exactly what happened. Instead of lenders lending to responsible homeowners with a high credit score alongside a down payment which would make up prime mortgages, lenders leant to not so responsible homeowners with a low credit score and no requirement of a down payment. This made up sub-prime mortgages. This was the turning point. Now subprime mortgage lenders had a massive market to sell to, wall street. They were ready to pick up all the subprime loans the mortgage lenders were selling and “package them up with other loans (some quality, some not), and sell them off to investors. In addition, 80% of these bundled securities magically became investment grade (‘A’ rated or higher), thanks to rating agencies”

During 2008, a series of economic disasters led to a worldwide debt crisis. All over the world, interest rates were at a record low. These low rates “fuelled domestic spending and spurred inflation in wages and goods” which encouraged people to take out loans and spend money they did not have (The Causes: A Very Short History of the Crisis). These easy credit conditions led to a debt bubble that inevitably burst with worldwide consequences. Following the collapse of the US mortgage market, Lehman Brothers filed for bankruptcy. Although Lehman Brothers was based in the US, they served as a worldwide investment bank with a large European contingent. Their collapse, along with the enormous amounts of worldwide debt, led to what is now known

The case study discusses about the problems of meltdown of American economy due to the toxic subprime mortgages. This study combines the financial crisis and responsibility with ethical issues and moral hazards. It also gives a detailed description about the failure of world’s largest economy and tried to calculate its impact across various stakeholders. It goes inside the facts and analyzed different stakeholders’ roles and responsibilities towards the crash. It also discusses about the government’s policies which further contributed towards the destruction and had huge impact not only in one sector but also to many other countries, which took years for its recovery.

The credit crisis is a worldwide financial crisis that includes terms like sub-prime mortgages, collateral debt obligations (CDOs), Frozen Credit Markets and the Credit Default Swaps. Everyone has been effected been affected in the credit crisis in a way. The credit crisis brings home owners and investors together. Home owners represent mortgages and the investors represent money which consists of large institutions such as mutual funds and also pension funds. The home owners and investors are brought together by the financial system- a bunch of banks (Wall Street) and the banks would earn commission. A few years ago, investors had a huge pile of money and they bought treasury

The subprime crisis that occurred during 2007 to 2009 is the first big crisis after the Great Depression in 1930s. This crisis had traumatised the World’s financial. U.S. Federal Reserve Board is the main cause of the crisis during the period of easy money and financial deregulation from mid 1990s till today. The unprecedented housing and consumer credit bubbles in the U.S. and other countries which share American’s policy orientation was due to over consumption and over borrowing. Till to date, the ripple effect of subprime crisis still linger in the financial market.