Collapse of the Housing Market Essay Example | Topics and Well Written Essays - 500 words

Collapse of the Housing Market - Essay Example The cracks appeared in the banking system three years later. Housing prices started falling in the year 2005. Initial symptom appeared in the market for sub prime residential mortgage-supported securities as investment demand shrank in 2006. Cracks in financial market became wide open in June 2007 with the failure to meet the lenders’ call on Collateralised Debt Obligations (CDOs) by hedge funds for subprime loans. In a way, it was the overconfidence of the mortgage brokers who went on selling loans to home buyers in the sub prime sector of the housing market due to market hype (Financial World 26-28). The recessionary trends appeared with the sub prime lending to home borrowers. The crisis started from Cleveland where loans in huge amount were cleared without verifying income and documents by the mortgage brokers. Refinancing was allowed on the condition that new sub prime mortgage would start after two years at double the prevailing interest rates. The crisis deepened when t he whole of America came under its influence as property prices touched a new height; as a result, demand for owning property increased because of mortgage brokers and refinancing. When the interest reset period ended after two years, interest rates went higher because Fed interest rates also increased on which sub prime mortgage interests were based (BBC News 9-13).