The Subprime Mortgage Crisis Was Caused By The Housing Market Bubble

1135 Words Nov 11th, 2016 5 Pages
According to Pajarska and Jociene (2014) the subprime mortgage crisis was caused by the credit boom and the housing market bubble. It is argued that the direct cause of the financial turmoil was the steep increase and subsequent sharp decline of housing prices, which in conjunction with poor lending practices, led to large losses on mortgages and mortgage-related instruments in many financial institutions (Pajarska et al., 2014). Financial institutions’ standards for granting mortgages became increasingly low. Subsequently, numerous subprime loans were offered to high-risk individuals with low incomes and/or bad credit at a higher interest rate.
It is imperative to understand why subprime mortgages came into effect. In order to provide a larger group of people with loans, the federal government enacted a number of acts such as the Community Reinvestment Act (CRA) of 1977, the Deregulation and Monetary Control Act of 1980, and the Tax Reform Act of 1986. According to the Federal Reserve, the Community Reinvestment Act (CRA) of 1977 was intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate-income neighborhoods (“Community Reinvestment Act (CRA)”, 2014). The Federal Reserve asserts that the Deregulation and Monetary Control Act of 1980 authorized depository institutions to offer interest bearing transaction accounts to individuals and nonprofit organizations (“Depository Institutions…

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