Subprime mortgage crisis - Wikipedia, the free encyclopedia Page 1 of 26 Subprime mortgage crisis From Wikipedia, the free encyclopedia The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the Part of a series on: global financial system. 2007–2009 Financial crisis Approximately 80% of U.S. mortgages issued in recent years Major dimensions to subprime borrowers were adjustable-rate mortgages.[1] When U.S. house prices began to decline in 2006-07, Subprime crisis impact timeline refinancing became more difficult and as adjustable-rate United States housing bubble mortgages began to reset at higher rates, mortgage Subprime mortgage crisis delinquencies soared. Securities backed with subprime Late 2000s recession mortgages, widely held by financial firms, lost most of their Automotive industry crisis value. The result has been a large decline in the capital of 2000s energy crisis many banks and USA government sponsored enterprises, tightening credit around the world. By country Contents Belgium Iceland Ireland 1 Background and timeline of events Latvia 1.1 Mortgage market Russia 2 Causes Spain 2.1 Boom and bust in the housing market 2.2 Speculation Summits 2.3 High-risk mortgage loans and lending/borrowing practices 2.4 Securitization practices 2008 G-20 Washington summit 2.5 Inaccurate credit ratings 34th G8 summit 2.6 Government policies APEC Peru 2008 2.7 Policies of central banks 2009 G-20 London summit 2.8 Financial institution debt levels and incentives Legislation 2.9 Credit default swaps 2.10 Investment in U.S. by foreigners of their proceeds from America's net imports Banking (Special Provisions) Act 2008 2.11 Boom and collapse of the shadow banking Housing and Economic Recovery Act of 2008 system Economic Stimulus Act of 2008 3 Impacts Emergency Economic Stabilization Act of 2008 3.1 Impact in the U.S. Troubled Assets Relief.. (TARP) 3.2 Financial market impacts, 2007 Term Asset-Backed Securities Loan Facility 3.3 Financial market impacts, 2008 2008 United Kingdom bank rescue package 4 Responses 2008 European Union stimulus plan 4.1 Federal Reserve and central banks 2008 Chinese economic stimulus plan 4.2 Economic stimulus 2008 East Asian meetings 4.3 Bank solvency and capital replenishment Anglo Irish Bank Corporation Bill 2009 4.4 Bailouts and failures of financial firms American Recovery and Reinvestment Act of 2009 4.5 Homeowner assistance Green New Deal 4.5.1 Homeowners Affordability and Stability Plan http://en.wikipedia.org/wiki/Subprime_mortgage_crisis 6/24/2009 Subprime mortgage crisis - Wikipedia, the free encyclopedia Page 2 of 26 5 Regulatory proposals and long-term solutions Company bailouts 5.1 Other responses 6 Implications AIG (150B USD) 7 See also 7.1 Other housing bubbles Citigroup Bank of America 8 References GM 9 Further reading Chrysler (4B) 10 External links Bailout Background and timeline of events Company failures New Century Financial Corporation American Freedom Mortgage American Home Mortgage Bernard L. Madoff Investment Securities LLC Charter Communications Lehman Brothers bankruptcy Linens 'n Things Mervyns NetBank Terra Securities scandal Sentinel Management Group Washington Mutual Icesave Kaupthing Singer & Friedlander Yamato Life Circuit City Allco Finance Group Waterford Wedgwood Saab Automobile BearingPoint Tweeter Chrysler bankruptcy General Motors bankruptcy Solutions Subprime mortgage crisis solutions debate The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006.[2][3] High default rates on "subprime" and adjustable rate mortgages (ARM), began to increase quickly thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more http://en.wikipedia.org/wiki/Subprime_mortgage_crisis 6/24/2009 Subprime mortgage crisis - Wikipedia, the free encyclopedia Page 3 of 26 difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. In the years leading up to the crisis, high consumption and low savings rates in the U.S. contributed to significant amounts of foreign money flowing into the U.S. from fast-growing economies in Asia and oil-producing countries. This inflow of funds combined with low U.S. interest rates from 2002-2004 resulted in easy credit conditions, which fueled both housing and credit bubbles. Loans of Factors Contributing to various types (e.g., mortgage, credit card, and auto) were easy to obtain and Housing Bubble – Diagram 1 of 2 consumers assumed an unprecedented debt load.[4] As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of U.S. dollars globally.[5] Domino Effect As Housing While the housing and credit bubbles built, a series of factors caused the Prices Declined – Diagram 2 financial system to become increasingly fragile. Policymakers did not recognize of 2 the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations.[6] These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses.[7] These losses impacted the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions, assuming significant additional financial commitments. The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. Effects on global stock markets due to the crisis have been dramatic. Between 1 January and 11 October 2008, owners of stocks in U.S. corporations had suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40%.[8] Losses in the stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine.[9] Leaders of the larger developed and emerging nations met in November 2008 and March 2009 to formulate strategies for addressing the crisis.[10] As of April 2009, many of the root causes of the crisis had yet to be addressed. A variety of solutions have been proposed by government officials, central bankers, economists, and business executives.[11][12][13] Mortgage market Subprime borrowers typically have weakened credit histories and reduced repayment capacity. Subprime loans have a higher risk of default than loans to prime borrowers.[14] If a borrower is delinquent in making timely mortgage payments to the loan servicer (a bank or other financial firm), the lender may take possession of the property, in a process called foreclosure. The value of USA subprime mortgages was estimated at $1.3 trillion as of March [15] [16] 2007, with over 7.5 million first-lien subprime mortgages outstanding. Number of U.S. residential Between 2004-2006 the share of subprime mortgages relative to total properties subject to originations ranged from 18%-21%, versus less than 10% in 2001-2003 and http://en.wikipedia.org/wiki/Subprime_mortgage_crisis 6/24/2009 Subprime mortgage crisis - Wikipedia, the free encyclopedia Page 4 of 26 [17][18] foreclosure actions by quarter during 2007. In the third quarter of 2007, subprime ARMs making up (2007-2009). only 6.8% of USA mortgages outstanding also accounted for 43% of the foreclosures which began during that quarter.[19] By October 2007, approximately 16% of subprime adjustable rate mortgages (ARM) were either 90-days delinquent or the lender had begun foreclosure proceedings, roughly triple the rate of 2005.[20] By January 2008, the delinquency rate had risen to 21%[21] and by May 2008 it was 25%.[22] The value of all outstanding residential mortgages, owed by USA households to purchase residences housing at most four families, was US$9.9 trillion as of year-end 2006, and US$10.6 trillion as of midyear 2008.[23] During 2007, lenders had begun foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006.[24] This increased to 2.3 million in 2008, an 81% increase vs.