The US Housing Market and the Subprime Mortgage Crisis (B): Impact on the US Economy

            
 
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Case Details:

Case Code : BENV015
Case Length : 28 Pages
Period : 2001-2007
Pub Date : 2008
Teaching Note :Not Available
Organization : -
Industry : Financial Services
Countries : USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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Excerpts

The Origins of the Subprime Mortgage Crisis

The origins of the subprime crisis could be traced to 2001-02. At that time, the 'dotcom'bubble had burst and the US economy was in the grip of recession. Alan Greenspan (Greenspan), then Chairman of the Federal Reserve, began reducing interest rates in an effort to encourage economic activity. Between March 2001 and June 2003, the interest rate was reduced from 5 percent to 1 percent (Refer Exhibit III for the federal funds rate between 2000 and 2003).

The series of interest rate cuts brought the mortgage rates down as they were set in relation to 10-year Treasury bond yields, which, in turn, were influenced by interest rates...

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Effects of the Mortgage Crisis on the US Economy

As the number of delinquencies and foreclosures increased, mortgage companies and other lenders began applying tighter standards for home loans. This made it difficult for individuals to get subprime and 'jumbo'mortgages. “You're seeing credit score requirements being increased. You're seeing documentation firming up. Fewer people will get loans and maybe rightly so,” said Bob Walters, chief economist with Quicken Loans...

Dealing with the Crisis

With the crisis in the subprime mortgage sector drying up liquidity, some mortgage companies and financial institutions announced measures to help delinquent borrowers.

And as the crisis threatened to slow down the US economy, the US government and the US Federal Reserve also came up with several measures to tackle the crisis.

In mid-2007, some mortgage companies and financial institutions announced measures to help mortgage borrowers...

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