The housing bubble's role in the 2008 financial crisis and bailout

U.S. Financial Crisis and Bailout Plan

The largest contributor to the recent financial crisis in the United States was the housing bubble. The Community Reinvestment Act pressured lenders into lowering the qualifications of applicants, in order to increase the percentage of poor people who got mortgages and deregulation paved the way for this to happen (the financial mess: How we got here). By 2006, 30% of all mortgages went to people who wouldn't have otherwise qualified and who simply couldn't afford the loans (the financial mess: How we got here). Banks and mortgage brokers were paid large fees to originate and service mortgages and didn't really care if they were likely to default because they sold these mortgages to others (Crotty, 2008). Investment banks packaged these questionable mortgages into mortgage-backed securities that were then sold to banks, hedge funds, pension funds and insurance companies around the world (Crotty, 2008). As easy access to lending drove house prices up, many Americans thought that prices would continue to rise and that they would be able to keep refinancing their homes to avoid paying their high adjustable interest rates loans (Baker, 2008). Also, homeowners withdrew equity as their home values went up, allowing rapid growth in consumption amidst weak job growth and stagnant wages (Baker, 2008). As everyone now knows, the bubble burst as high prices led to oversupply, which eventually led to a collapse in the housing market (Baker, 2008).