Major downturn and subprime mortgage collapse.2C 2007 United States housing market correction

a graph showing median , average sales prices of new homes sold in united states between 1963 , 2008.



a graph showing monthly median , average sales prices of new homes sold in united states between 1999 , 2009.




incomplete housing development near houston, texas.



sales prices of homes sold 2002-2010.

the white house council of economic advisers lowered forecast u.s. economic growth in 2008 3.1 per cent 2.7 per cent , forecast higher unemployment, reflecting turmoil in credit , residential real-estate markets. bush administration economic advisers revised unemployment outlook , predicted unemployment rate rise above 5 per cent, prevailing unemployment rate of 4.6 per cent.

the appreciation of home values far exceeded income growth of many of these homebuyers, pushing them leverage beyond means. borrowed more money in order purchase homes cost greater ability meet mortgage obligations. many of these homebuyers took out adjustable-rate mortgages during period of low interest rates in order purchase home of dreams. initially, able meet mortgage obligations low teaser rates being charged in years of mortgage.

as federal reserve bank applied monetary contraction policy in 2005, many homeowners stunned when adjustable-rate mortgages began reset higher rates in mid-2007 , monthly payments jumped far above ability meet monthly mortgage payments. homeowners began defaulting on mortgages in mid-2007, , cracks in u.s. housing foundation became apparent.

subprime mortgage industry collapse

in march 2007, united states subprime mortgage industry collapsed due higher-than-expected home foreclosure rates, more 25 subprime lenders declaring bankruptcy, announcing significant losses, or putting sale. stock of country s largest subprime lender, new century financial, plunged 84% amid justice department investigations, before filing chapter 11 bankruptcy on 2 april 2007 liabilities exceeding $100 million.

the manager of world s largest bond fund pimco, warned in june 2007 subprime mortgage crisis not isolated event , take toll on economy , impact impaired prices of homes. bill gross, reputable financial guru , sarcastically , ominously criticized credit ratings of mortgage-based cdos facing collapse:

aaa? wooed mr. moody s , mr. poor s, makeup, six-inch hooker heels, , tramp stamp. many of these looking girls not high-class assets worth 100 cents on dollar. ... , sorry ben, derivatives two-edged sword. yes, diversify risk , direct away banking system eventual hands of unknown buyers, multiply leverage andromeda strain. when interest rates go up, petri dish turns benign experiment in financial engineering destructive virus because cost of leverage reduces price of assets. houses anyone? ... aaas? [t]he point there hundreds of billions of dollars of toxic waste , whether or not re in cdos or bear stearns hedge funds matters extent of timing of unwind. [t]he subprime crisis not isolated event , won t contained few days of headlines in new york times ... flaw lies in homes financed cheap , in cases gratuitous money in 2004, 2005, , 2006. because while bear hedge funds history, millions , millions of homes not. re not going anywhere ... except mortgages is. mortgage payments going up, up, , ... , delinquencies , defaults. recent research piece bank of america estimates approximately $500 billion of adjustable rate mortgages scheduled reset skyward in 2007 average of on 200 basis points. 2008 holds more surprises $700 billion arms subject reset, ¾ of subprimes ... problem—aided , abetted wall street—ultimately resides in america s heartland, millions , millions of overpriced homes , asset-backed collateral different address—main street.

financial analysts predicted subprime mortgage collapse result in earnings reductions large wall street investment banks trading in mortgage-backed securities, bear stearns, lehman brothers, goldman sachs, merrill lynch, , morgan stanley. solvency of 2 troubled hedge funds managed bear stearns imperliled in june 2007 after merrill lynch sold off assets seized funds , 3 other banks closed out positions them. bear stearns funds once had on $20 billion of assets, lost billions of dollars on securities backed subprime mortgages.

h&r block reported quarterly loss of $677 million on discontinued operations, included subprime lender option one, writedowns, loss provisions on mortgage loans , lower prices available mortgages in secondary market mortgages. units net asset value fell 21% $1.1 billion of april 30, 2007. head of mortgage industry consulting firm wakefield co. warned, going meltdown of unparalleled proportions. billions lost. bear stearns pledged us$3.2 billion in loans on 22 june 2007 bail out 1 of hedge funds collapsing because of bad bets on subprime mortgages.

peter schiff, president of euro pacific capital, argued if bonds in bear stearns funds auctioned on open market, weaker values plainly revealed. schiff added, force other hedge funds mark down value of holdings. wonder wall street pulling out stops avoid such catastrophe? ... true weakness reveal abyss housing market plummet.

a new york times report connected hedge fund crisis lax lending standards: crisis week near collapse of 2 hedge funds managed bear stearns stems directly slumping housing market , fallout loose lending practices showered money on people weak, or subprime, credit, leaving many of them struggling stay in homes.

in wake of mortgage industry meltdown, senator chris dodd, chairman of banking committee held hearings in march 2007 , asked executives top 5 subprime mortgage companies testify , explain lending practices. dodd said, predatory lending practices endangered home ownership millions of people . moreover, democratic senators such senator charles schumer of new york proposing federal government bailout of subprime borrowers in order save homeowners losing residences. opponents of such proposal asserted government bailout of subprime borrowers not in best interests of u.s. economy because set bad precedent, create moral hazard, , worsen speculation problem in housing market.

lou ranieri of salomon brothers, inventor of mortgage-backed securities market in 1970s, warned of future impact of mortgage defaults: leading edge of storm. ... if think bad, imagine s going in middle of crisis. in opinion, more $100 billion of home loans default when problems in subprime industry appear in prime mortgage markets. fed chairman alan greenspan praised rise of subprime mortgage industry , tools used assess credit-worthiness in april 2005 speech:

innovation has brought multitude of new products, such subprime loans , niche credit programs immigrants. such developments representative of market responses have driven financial services industry throughout history of our country ... these advances in technology, lenders have taken advantage of credit-scoring models , other techniques efficiently extending credit broader spectrum of consumers. ... once more-marginal applicants have been denied credit, lenders able quite efficiently judge risk posed individual applicants , price risk appropriately. these improvements have led rapid growth in subprime mortgage lending; indeed, today subprime mortgages account 10 percent of number of mortgages outstanding, 1 or 2 percent in 1990s.

because of these remarks, along encouragement use of adjustable-rate mortgages, greenspan criticized role in rise of housing bubble , subsequent problems in mortgage industry.