Housing crisis Essay Example | Topics and Well Written Essays - 750 words - 10

Housing crisis - Essay Example Eventually, homeowners fell into foreclosure and delinquency. These mortgages failed to yield returns to lenders, making institutions reluctant to re-evaluate their assets that could dispose of their insolvency. Lack of institutions to purchase loans made the market to freeze making lenders to incur losses they could not absorb. The collapse of the housing market has been blamed on many participants such as potential homeowners, lenders, investors, hedge funds and government interference (Smith & Susan 126). Lenders are responsible for the housing bubble in the United States. They were responsible for lending funds to poor credit people with a great risk of default. The flooding of the market with capital liquidity by the central bank lowered the rate of interest and depressed risk premiums while investors sought opportunities that are risky in bolstering their returns for investment. Lenders at this point had adequate capital for lending and were willing to indulge in more risk to e nable their realization of increased investment returns (Fried 11). Government The housing bubble started with the efforts of the government to expand homeownership to people. The legislation enacted by authorities required investors of government-backed mortgages such as Freddie Mac and Fannie Mae, to guarantee loans to people with poor or no credit and incapable of making down payments. This policy of the Federal Reserve enabled interest rates to maintain lower levels. This eventually made house investments more attractive. Increase in prices compelled mortgage banks to relax standards of lending further. This made prices for homes to increase until the housing bubble began (Smith & Susan 131). Homeowners Potential homebuyers viewed homeownership as a less risky investment. Incentives provided by lending institutions led to the issuance of subprime loans with varying interest rates to households with no or poor credit histories. With the increased demand for houses, prices rose an d more homes built and availed in the market. They believed in price appreciation that would allow them to refinance at relatively lower rates. However, housing bubble erupted and prices reduced significantly. The rest of their mortgages made most of the homeowners incapable of refinancing their mortgages to lower rates since no equity was created as prices for houses fell. The homeowners decided to set their mortgage interests higher making them unaffordable. Most of them had no alternative than to default on mortgages (Fried 14). Investors are to blame for the collapse of housing market just as homeowners. This is because they invested in collateralized debt obligations (CDOs) and were willing to buy them at very low rates over bonds. The lower rates are responsible for the increased demand for subprime loans. Investors bear the blame for the housing bubble since it was their obligation to be diligent while investing and failed to make viable expectations (Fried 23). Banks The len ders increased use of the secondary mortgage market led to increased subprime loans originated by lenders. Instead of holding onto these mortgages in books, lenders sold their mortgages in the secondary market and collected fees that originated from these market. More capital for lending circulated all over eventually increasing liquidity. Demand for mortgages emerged from the availability of assets that accumulated to form securities such as CDOs.