Question

Give a brief history of the “Great Recession”—be sure to explain the practices in the mortgage industry that helped lead to it and how it eventually affected the national economy.

Answer 1

The Great Recession was a period of economic decline in the U.S. in 2007- 2009. It has followed the financial crisis of 2007-08 in the country and U.S. subprime mortgage crisis. The Great Recession has resulted in the shortage of required assets in the economy and also the collapse of the financial sectors.

The crises started with sharp fall in the housing prices and regulatory authorities were unable the access the risk and its intensity in timely manner to take some corrective measures. The practices in the mortgage industry that helped lead to it is subprime lending which is a second class lending to the individuals whose repayment record of loans is not very good. They generally offered a higher rate of interest for their loans than the prime lenders as the default risk is higher for them. The regulators failed to efficiently regulate this subprime market and stabilize the system. The mortgage brokers offered risky mortgage loans to consumers and increased the default risk and these processes were not adequately regulated by the government regulatory authorities. Trading in mortgage backed securities spread risk in financial system and created threat of market failure.

Mortgage backed securities are the securities backed by payments of interest and principle on mortgage loans or asset backed loans. The mortgages are sold to a group of individuals or a government agency or investment bank so that it can be securitizes the various loans with similar payment plans into a pool of security and sold to the investors. But in this process also the adequate measures to mitigate the risk are not followed and due to improper assessment and inadequate regulation of Mortgage Backed Securities, the financial crises took place in 2008 and led to great recession and eventually affected the national economy.