How the Bursting of the U.S. Housing Bubble Triggered

The banking and financial market meltdown of 2007-2009 resulted in the downfall of large financial institutions, bail kayoeds for banks by national governments, and global declines in stock markets. A suffering trapping market likewise contributed to the economical recession. While there were umpteen factors that triggered the global market meltdown, this paper will nidus on the factors that created the U. S. house bubble and how the bursting of the U. S. housing bubble sparked the recession. Home ownership is part of the American Dream, but be suffer homes can be expensive, most mess need to borrow money to buy them.In the early 2000s, mortgage rates were low, which allowed people to borrow more money with lower monthly payments. According to Katalina M. Bianco, author of The Subprime L set asideing Crisis Causes and Effects of the owe Meltdown the U. S. ownership rate increased from 64% in 1994 to 69. 2% in 2004 this demand helped force out the rise of housing prices (Bian co, 2008). Because home prices were increasing, many homeowners decided to refinance and take second mortgages to cash out of their homes equity.According to Merrill Goozner of The Fiscal Times, a simple explanation for what caused the Great Recession is people had too much debt during the housing bubble, too many homeowners used their inflated home equity like piggybanks to support their spending (Goozner, 2012). Banks also contributed to the creation of the U. S housing bubble by offering easy access to money. Many borrowers got into uplifted risk mortgages and numerous people with bad credit could qualify as subprime borrowers.According to Bianco, subprime borrowing was a discern factor in the increase in home ownership rates during the housing bubble (Bianco, 2008). virtually experts suggest mortgage standards relaxed during this period because each link in the mortgage chain believed it was passing on the risk to someone else (Bianco, 2008). Most banks do not keep mortgages on their books instead, they sell these loans to investors. Before the crisis, many people, businesses, and governments chose to invest in mortgage linked investments because of the low interest rates.After the dot-com bubble crash in 2000, the Federal Reserve Board cut short-term interest rates from about 6. 5% to 1% (Bianco, 2008). Since banks and mortgage brokers could sell loans before they went bad, loan quality deteriorated. Mortgage denial rates reported beneath the Home Mortgage Disclosure Act dropped from 29% in 1998 to 14% in 2002 and 2003 (Bianco, 2008). When home prices halt increasing and interest rates rose, monthly payments increased due to adjustable rate mortgages. This marked the end of the housing bubble.Many borrowers could no longer afford their mortgages, and defaulted on their loans. The U. S. foreclosure epidemic eroded the financial strength of banking institutions. losses on other types of loans started to increase as the crisis extended beyond the housi ng market. Banks and investors began losing money, and to decrease their exposure risk, trim lending to each other. As a result of the slowing lending, hundreds of banks and high-profile institutions failed. Just as a fall of factors caused the mortgage crisis, a number of different factors caused the global recession.The bursting of the U. S. housing bubble was not the only cause of the banking and financial meltdown of 2007-2009, but it was the immediate trigger of the economic crisis. Word Count 550 ? Works Cited Bianco, K. M. (2008, April 8). business. cch. com. Retrieved from http//business. cch. com/bankingfinance/focus/news/Subprime_WP_rev. pdf Goozner, M. (2012, March 16). Real recovery Americas debt is on the decline. The Fiscal Times. Retrieved from http//www. thefiscaltimes. com/Articles/2012/03/16/Real-Recovery-Americas-Debt-is-on-the-Decline. aspx