Housing Crisis Counterparts - Essay Example

These mortgages failed to yield returns to lenders, making institutions reluctant to re-evaluate their assets that could dispose of their insolvency. The lack of institutions to purchase loans made the market freeze making lenders incur losses they could not absorb. The collapse of the housing market has been blamed on many participants such as potential homeowners, lenders, investors, hedge funds, and government interference (Smith & Susan, 126).

Lenders are responsible for the housing bubble in the United States. They were responsible for lending funds to poor credit people with a great risk of default. The flooding of the market with capital liquidity by the central bank lowered the rate of interest and depressed risk premiums while investors sought opportunities that are risky in bolstering their investment returns. Lenders at this point had adequate capital for lending and were willing to indulge in more risk to enable their realization of increased investment returns (Fried, 11).

The housing bubble started with the efforts of the government to expand homeownership to people. The legislation enacted by authorities required investors of government-backed mortgages such as Freddie Mac and Fannie Mae, to guarantee loans to people with poor or no credit and incapable of making down payments. This policy of the Federal Reserve enabled interest rates to maintain lower levels. This eventually made house investments more attractive. An increase in prices compelled mortgage banks to relax standards of lending further. This made prices for homes increase until the housing bubble began (Smith & Susan, 131).

Potential homebuyers viewed homeownership as a less risky investment. Incentives provided by lending institutions led to the issuance of subprime loans with varying interest rates to households with no or poor credit histories. With the increased demand for houses, prices rose and more homes were built and availed in the market. They believed in price appreciation that would allow them to refinance at relatively lower rates. However, the housing bubble erupted and prices reduced significantly. The reset of their mortgages made most homeowners incapable of refinancing their mortgages to lower rates since no equity was created as prices for houses fell. The homeowners decided to set their mortgage interests higher making them unaffordable. Most of them had no alternative but to default on mortgages (Fried, 14).

Investors are to blame for the collapse of the housing market just as homeowners. This is because they invested in collateralized debt obligations (CDOs) and were willing to buy them at very low rates over bonds. The lower rates are responsible for the increased demand for subprime loans. Investors bear the blame for the housing bubble since it was their obligation to be diligent while investing and failed to make viable expectations (Fried, 23). 

The lenders increased use of the secondary mortgage market led to increased subprime loans originated by lenders. Instead of holding to these mortgages in books, lenders sold their mortgages in the secondary market and collected fees that originated from these markets. More capital for lending circulated all over eventually increasing liquidity. Demand for mortgages emerged from the availability of assets that accumulated to form securities such as CDOs. Investment banks played a role by buying lenders’ mortgages and securitizing them into bonds. These were sold to investors via CDOs (Hardaway, 224).

The hedge fund industry was responsible for the housing bubble. The hedge fund industry aggravated the housing bubble by lowering rates and raising the volatility of the market, causing losses to investors. A hedge fund strategy such as credit arbitrage entailed credit buying of subprime bonds and hedging with credit default swaps. Increased demand for collateralized debt obligations using advantage allowed the purchase of relatively more bonds and CDOs than it could with available capital alone. This caused a lowering of subprime interest rates and worsened the situation. The involvement of advantage provided grounds for volatility as realized by investors concerning the reduced quality of subprime collateralized debt obligations (Hardaway, 228).

A mix of factors and groups of people such as homeowners, investors, government interference, misplaced incentives, and lenders are held responsible for the collapse of the housing market. Human behavior and dire greed for mortgage loans increased the demand for these homes. Consequently, this led to the housing bubble experienced in the United States. The result of these events was the increased activities of foreclosure, hedge funds, and lenders becoming bankrupt. Fears also emerged about a reduction in consumer spending and economic growth.