What Caused the Bubble and Bust in the US Mortgage Market Term Paper

What Caused the Bubble and Bust in the US owe Market - Term Paper ExampleIntroduction In the year of 2007, the valet de chambre witnessed an economic crisis of a magnitude unimaginable in todays sophisticated times even its detailed planning, theories and innovations. Some compared it to the Great Depression of 1930s. It began with the crashing of the US Mortgage Market that is one of the most progressive sectors in the US economy. Gradually, it spread to the financial of many other countries and in 2008 one of the biggest investment banks in UK, the Lehman Brothers, crashed. Though the crisis affected the financial sector resulting in problems pertaining to banking, it soon got transmitted to the real sector by a fall in employment and output. The ultimate effect was an economic slowdown. (Muller, 2010, p.1) In this research, we will contemplate the factors that led to the crash of the US Mortgage Market and contributed to a large-scale financial crisis. The US Mortgage Market To identify the factors responsible for the bursting of the bubble in the US Housing sector, its structure and mechanism has to be studied in detail. General structure The US mortgage market has been one of the oldest sectors in the US economy. ... As a result, of securitization, the banks, now, did not have to wait till the maturity of loans since they have already been bundled and sell off to investors in return for its monetary value. Consequently, lending of credit change magnitude earnings per share increased and the dividend to shareholders and corpo regularize increased as well. Loans were bundled as per the requirement of the investors and sold to the one offering the best rate of interest. Soon, the primary sector banks and S&L were completely driven out from taking part presently in the mortgage market. It was, now, ruled by the secondary sector organizations, investment and mortgage banks. These banks formed a circular system with no lender of last resort like the FED or governance bank and S&L. (Kim, 2010, p.139) Mechanism of the Bursting of Bubble in the Housing sector The secondary sector banks diligent in mutual securitization and purchase of one anothers loans. Also, due to lack of regulatory measures in the market, information about borrowers was either not verified or it was foreclosed, in the greed of making more(prenominal) profits and expanding. This resulted in an increase in the number of Non-Performing Assets (NPAs). The effect of each NPA on the mortgage market was magnified due the large number of layers created and it corroded the credit base. Finally, as the negative effect from these NPAs outweighed the overall wealth of these organizations, the entire mortgage market collapsed. Thus, the banks in the financial sector suffered severe losses and great deal withdrew their money from these banks. In 2007, two hedge funds, the blue Grade Structured Credit Strategies Fund and the High Grade Structured Credit Strategies Enhance d