The housing crisis is an economic bubble affecting many areas in the United States. House prices were high and peaked in 2006. Gradually, the prices began to decline in 2006 and 2007.
They’re still lowering to date. As this picture unfolds, it emerges that any form of the housing bubble of the United States leaves a ripple effect which directly hits not only the valuation of homes, but also the states home builder’s, the home supply retailing outlets, the real estate industry as a whole as well as the mortgage markets. The crisis has posed a very huge risk to the American economy.
As Randel stated, “the Federal Reserve lowered interest rates during the period of 1995-2000 which created easy credit for banks to make loans. Rates were extremely high by 2006 hence lowering demand and increasing monthly payments for adjustable mortgages” (Randel, 144). This increased supply and consequently ended up in further lowering housing prices.
Popular belief that houses as opposed to other investments do not fall in value sparked the huge number of Americans to buy homes. However this is not the case.
Furthermore, it’s also widely believed that homes result in above average returns on investment. It is therefore only reasonable to take for granted that the price of houses only just manage to top price increases over the elongated term.
In the years of 2005 through to 2006, there were copious advertisements as well as shows on television which were aimed at enhancing investment in the real estate sector. Books on real estate investment were being marketed and sold all over. This sparked investment in the housing industry.
Clarey observed the fact that, “as home prices began to rise in early 2000-2001 following reduced interest rates, purchase of homes was on the rise” (Clarey, 256). Speculators bought houses in large numbers with an intention of selling them back for a quick profit.
Although the undertakings occurred well over twenty years ago, Fannie Mae and Freddie Mac were considered responsible for the credit crisis that resulted after the housing bubble of 2001-2007 burst. The two companies had a huge government backing and were both chartered by the US government as government sponsored enterprises (GSE’s).
The treasury department of the United States of America has been widely criticized for going out of their jurisdiction in the field of spending taxpayer’s money. This authority is preserved for congress only and this is held in the constitution of the United States of America.
The treasury also stands accused of overstepping boundaries that are put in place by the Housing and Economic Recovery Act of 2008. The two companies operating as monopolies had more disadvantages than benefits. Scrutiny by Sowell revealed that “the two companies made huge profits because they purchased and invested in mortgages and mortgage based securities with lower capital requirements than other financial institutions and banks” (Sowell, 213).
In 1977, the (C.R.A.) Community Reinvestment Act was passed. The act offers a scaffold for organizations that deal with finances, institutions of the community as well as local and national governments to be able to mutually encourage banking services geared towards the entire people of a society.
The C.R.A. basically ruled out lending of money in biased ways with consideration to factors such as race; this is referred to as “redlining”. The Community Reinvestment Act also gives confidence to efforts to fit the credit requirements of all categories of people in a society. These include inhabitants of modest to lower income areas
The US congress, being in charge of the government regulatory authority largely contributed to worsening of the housing crisis. In the year 2008 alone, the government of the United States of America apportioned well over US $ 800 billion to extraordinary credit as well as salvage that was relation to the housing bubble in the United States of America.
More than half of that money was directed to the quasi- governmental organizations of the Federal Housing Administration as well as the Fannie Mae and Freddie Mac. Furthermore, the treasury department on December 24, 2009 went ahead and made an unprecedented pronouncement stating that it was going to support Fannie Mae as well as Freddie Mac by giving them unending financial aid for a period of three years from there henceforth.
This was against a backdrop of their recognition of the fact that they had incurred losses of much more than US $ 400 billion till then. During the large number of house buying, some brokers handed low interest mortgages to parties that were not qualified to handle large debt.
Lenders did not factor customers’ claims of income and promoted adjustable rate mortgages as they promised greater returns than fixed rate mortgages. Currently uninformed house buyers are unable to meet the terms of their respective contracts and are defaulting on their payments. Many Americans have already lost their houses to foreclosure. It is the laxity in government regulation that has greatly affected the mortgage industry.
By signing the 2008 housing and economic recovery act into law after it had been passed by the congress of the United States of America, President G. W. Bush made wider the ability of the institution FHFA to control Fannie Mae and Freddie Mac that had spiraled out of control.
The law also enabled the treasury department of the United States, the clout that would lend finances to the ailing institutions of either Fannie Mae or Freddie Mac. This would be bordered by the sole fact of the quantity of liabilities that the federal government as a whole is allowed to obligate to by the law.
The law that was signed on July 30, 2008 by President G. W. Bush, pushed up the maximum of the treasury departments debt by US $ 800 billion, adding up to a whopping grand total of US $ 10.7 trillion. This apparently was in the hope of the latent want for the treasury department to have the elasticity that would enable those help the Federal Home Loan Banks, Fannie Mae or Freddie Mac.
In a synopsis, avoiding a repetition of the housing predicament hardly deserves an overhaul of the financial or any other structure. What would work better is an acknowledgement that the key policies on housing in the United States are highly flawed and need to be restructured.
The first step in correcting the situation is to straighten out the United States government policies on housing. Strict requirements may be enforced so as to regulate lending and borrowing activities. Added to that, rules that promote fair, easier and responsible lending practices should be strictly adhered to by the stakeholders. This will be of benefit to both borrowers and lenders in the economy
Works Cited
Clarey, Aaron. Behind the housing crash. South Carolina: Book Surge Publishing, 2011. Print.
Randel, Jim. What every homeowner and homebuyer needs to know: The housing crisis. Connecticut: Rand Media Co., 2009. Print.
Sowell, Thomas. The housing boom and bust. New York: Basic Books, 2010. Print.