Write 10 page essay on the topic Analysis of the Article about the Reasons that Lead to Housing Market Crash in 2007.
Basically, loans were given to people that had low credit scores and, ultimately, were not able to keep up with their payments. This, in turn, leads to a wave of delinquencies and defaults. “Borrowers losses were limited to their small down payments. hence, the lions share of the losses was transmitted into the financial system and it collapsed”, concluded Gjerstad and Smith (2009).
Historically, housing accounted for one-third of household income in the United States. That changed under these new circumstances, where mortgages were written for a much higher percentage. Unfortunately, while income levels stayed the same, housing prices more than doubled in the timeframe from 2000 to 2007. Eventually, something had to give, say the authors (Gjerstad and Smith, in press). Sub-prime lending, the interest-only adjustable rate mortgages and negative-equity options at that point, were not able to sustain the flow of new buyers and the crash was inevitable.
In an attempt to rectify the problem, Bush administration, lead by The Department of the Treasury and the U.S. Department of Housing and Urban Development encouraged the founding of an alliance between lenders, investors, and non-profit organizations that would help homeowners facing foreclosures. The alliance was materialized under the name HOPE NOW. Hope Now website summarizes its goals: “This alliance will maximize outreach efforts to homeowners in distress to help them stay in their homes and will create a unified, coordinated plan to reach and help as many homeowners as possible. The members of this alliance recognize that by working together, they will be more effective than by working independently“. . .
The alliance managed to bring on board the biggest mortgage companies in the country. It included big lenders such are Bank of America, Citigroup, Inc. .