The U.S. Mortgage Failure

The U.S. Mortgage Failure

Introduction

This paper will be discussing US mortgage failure, which is the US financial crisis due to sub-prime mortgages. It was started from the great depression and its affects are also seen today. The volume of subprime mortgages in the U.S. increased sharply in recent years. In 2006, they accounted for more than 5 percent (Adam & Susan, 2010). Mortgages and every fifth lower mortgage quality is suitable for recovery. It is estimated that the market for subprime mortgages in the U.S. is 10-14 percent. Total loans or its value is about 1.2-1.5 trillion dollars.

Origins of the Crisis in the United States

Loan guarantees of Fannie Mae and Freddie Mac

At present, the global financial crisis has made ??a number of factors. Genesis can be seen already in the 30s of the twentieth century. One of the steps to get out American economy from the Great Depression was the establishment by the administration President Roosevelt government agency, the Federal National Mortgage Association (FNMA), commonly known as Fannie Mae. Her task was to provide guarantees for loans the mortgage. In 1970, another similar institution was established - the Federal Home Loan (Stewart, 2009). Mortgage Corporation (Freddie Mac). In recent years, these institutions for more than half of the credits granted in the U.S. (debt of U.S. households for mortgage loans is approximately 10 trillion dollars). The aim of the operation of those institutions was to increase access to credit and housing development. Indirectly, however, Fannie Mae and Freddie Mac helped to start an avalanche of crisis.

U.S. Banks' Credit Policy

The guarantees provided by Fannie Mae and Freddie Mac allow banks much loosen their lending criteria. In this way, U.S. banks have ceased enough to care about the quality of loan portfolio; do not pay attention to it, who gives of loans. In the 90s of the twentieth century ad that reads "Non proof incomes," or advertising providing mortgages without documenting sources and income were not uncommon. In this way, the U.S. market created a specific type of loans - the so-called. Subprime, and therefore of lower quality, granted to persons on the border of creditworthiness. 

Securitization

This is only part of the puzzle, which is contributed to the present crisis. The problem would not be as serious, if not for the development of securitization and debt conversion mechanism so on securities. In the early 80s of the twentieth century, the American financial markets a wealth of new instruments - bonds secured by mortgages. In time they gained the largest share among securities receivables. With this operation the banks, in order to obtain funds for further activities, resold debtors of another, larger banks. 

These loans in turn divided into smaller parts and emit bonds, which were secured mortgage loans (the first such bonds issued in 1983). The greatly simplified mechanism of securitization meant that the U.S. borrower ceased to be a debtor of the bank, which took loan and in a sense it became indebted to the buyer bonds (Reinhart & Carmen, 2008). In 2006 it brought up more than 10 percent profit per ...