Inttroduction

High-risk mortgage loans and lending/borrowing practices

In the years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers, including undocumented immigrants. Lending standards deteriorated particularly between 2004 and 2007, as the government-sponsored enterprise (GSE) mortgage market share (i.e. the share of Fannie Mae and Freddie Mac, which specialized in conventional, conforming, non-subprime mortgages) declined and private securitizers share grew, rising to more than half of mortgage securitizations.

Although cross-border bank lending has fallen sharply since the crisis, extending our bank ownership database from 1995-2009 up to 2013 shows only limited retrenchment in foreign bank presence. While banks from OECD countries reduced their foreign presence (but still represent 89% of foreign bank assets), those from emerging markets and developing countries expanded abroad and doubled their presence.

Especially advanced countries hit by a systemic crisis reduced their presence abroad.

Historically less than 2% of homebuyers lost their homes to foreclosure. But by 2009 over 40% of subprime adjustable rate mortgages were past due. (source: Financial Crisis Inquiry Report, p.217, figure 11.2)

Subprime mortgages grew from 5% of total originations ($35 billion) in 1994, to 20% ($600 billion) in 2006.  Another indicator of a "classic" boom-bust credit cycle, was a closing in the difference between subprime and prime mortgage interest rates (the "subprime markup") between 2001 and 2007.

In addition to considering higher-risk borrowers, lenders had offered progressively riskier loan options and borrowing incentives. In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever.  By comparison, China has down payment requirements that exceed 20%, with higher amounts for non-primary residences.

Growth in mortgage loan fraud based upon United States Department of the Treasury Suspicious Activity Report Analysis

To produce more mortgages and more securities, mortgage qualification guidelines became progressively looser. First, "stated income, verified assets" (SIVA) loans replaced proof of income with a "statement" of it. Then, "no income, verified assets" (NIVA) loans eliminated proof of employment requirements. Borrowers needed only to show proof of money in their bank accounts. "No Income, No Assets" (NINA) or Ninja loans eliminated the need to prove, or even to state any owned assets. All that was required for a mortgage was a credit score.

While housing prices were increasing, consumers were saving less  and both borrowing and spending more. Household debt grew from $705 billion at year end 1974, 60% of disposable personal income, to $7.4 trillion at yearend 2000, and finally to $14.5 trillion in midyear 2008, 134% of disposable personal income.  During 2008, the typical US household owned 13 credit cards, with 40% of households carrying a balance, up from 6% in 1970.

The United States housing bubble was a real estate bubble affecting over half of the United states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012.  On December 30, 2008, the Case–Shiller home price index reported its largest price drop in its history.  The credit crisis resulting from the bursting of the housing bubble is an important cause of the Great Recession in the United States.

Increased foreclosure rates in 2006–2007 among United States homeowners led to a crisis in August 2008 for the subprime, collateralized debt obligation (CDO), mortgage, credit, hedge fund, and foreign bank markets.  In October 2007, the United States Secretary of the Treasury called the bursting housing bubble "the most significant risk to our economy".

Any collapse of the United States housing bubble has a direct impact not only on home valuations, but mortgage markets, home builders, real estate, home supply retail outlets, Wall Street hedge funds held by large institutional investors, and foreign banks, increasing the risk of a nationwide recession.  Concerns about the impact of the collapsing housing and credit markets on the larger United States economy caused President George W. Bush and the Chairman of the Federal Reserve Ben Bernanke to announce a limited bailout of the united States housing market for homeowners who were unable to pay their mortgage debts.

In 2008 alone, the United States government allocated over $900 billion to special loans and rescues related to the United States housing bubble. This was shared between the public sector and the private sector. Because of the large market share of Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (both of which are government-sponsored enterprises) as well as the Federal Housing Administration, they received a substantial share of government support, even though their mortgages were more conservatively underwritten and actually performed better than those of the private sector.

2.