Mortgage and Housing Market Crises - Essay Example

From the above diagram as the demand for houses increase this shifts the demand curve to the right, this causes the prices to increase as shown above, when demand increase for houses then there will also be an increase in the demand for mortgages. The demand for mortgages increased and as the market bubble got more and more inflated there was a market bubble burst which resulted to low value of houses, this is made it impossible for home buyers to repay their mortgages as the value of their houses declined.

As the price of houses rose there was a rise in anticipation that the price in the housing market would still rise, for this reason therefore there was an increase in the level of borrowing in the united states, in this period the rate of borrowing increased four times and this resulted into more and more borrowing which was encouraged by the low interest rate mortgages and the high value return from the housing market, as a result of this the asset bubble rose and when the housing market experienced a bubble burst the prices declined to near zero and investors lost a lot of their value.

Increased in demand for mortgages increased the rate of mortgage frauds, many borrowers lied about their income levels which made it easier for them to qualify for mortgages, after the asset bubble burst the result of the mortgage crises that faced the state where people borrowed money to finance for houses but the value of their houses were too low at the time to cover the mortgage.The government:The government is also blamed for its role to this crisis, the government passed the community reinvestment act that stated that allowed borrowing to uncreditworthy customer, further it is also evident that the introduction of this act increased high risk loans to the renders, for this reason therefore it is clear that the mortgage crisis can be blamed to the government for failing to put in place policies that would have governed the housing market.

Effects of the crisis:The mortgage crisis affected almost everyone in the economy, the mortgage companies and other lenders lost a lot of finances as a result of this crisis, the housing market companies and mortgage companies performed poorly in the stock market following the crisis compared to other industries. Financial sector employment declined after the crisis, over 30, 000 employees lost their jobs during 2007 to march 2008. From this therefore it is clear that the housing market bubble led to loses in nearly everyone in the country including increased unemployment, poor stock market performance of financial institutions and loss of value of assets.

It is however anticipated that the housing market prices will continue to decline until it self adjust.Solving the crisis:There are two