US Housing Bubble

1. US Housing Bubble And Financial Crisis

2. Prime and Subprime Mortgages • Mortgage Brokers originate both Prime and Subprime Mortgages. • And sell the mortgages to Commercial Banks • Commercial Banks sell most of the Mortgages to Investment Banks • Investment Banks repackage the mortgages into complex securities and derivatives • Investment Banks sell these to investors

3. Investors • Domestic Investors such as Pension Funds • Foreign Investors including financial and non-financial institutions • Fannie Mae and Freddie Mac, both quasi- government agencies invested heavily Credit Agencies such as Standard and Poor gave the securities AAA ratings even though none of the mortgages were individually highly rated

4. Why did this happen? • 1. Government reduced borrowing requirements for subprime mortgages to help lower income people own their own home • 2. Investors demanded AAA securities with yields higher than other AAA investments such as US Treasury Bonds • 3. Commercial banks reduced lending requirements since the bank did not retain the credit risk • 4. Some Mortgage brokers sold fraudulent mortgages to the banks

5. Why did this happen? • 5. Some subprime borrowers lied on their mortgage application • 6. House prices kept rising until there were no more borrowers (2006 only subprime mortgages)