Limiting or Interveing in the Foreclosure of Defaulted Mortgage Loans

Limiting or intervening in the foreclosure of defaulted mortgage loans

August 23, 2013

TABLE OF CONTENTS

ABSTRACT 3

HISTORY OF THE MORTGAGE CRISIS 4

CONSEQUENCES OF MORTGAGE CRISIS 5

WHO IS TO BLAME? 6

INTERVENTION AND RECOVERY MODE 7

HAMP 8

CONCLUSION 9

REFERENCES 11

ABSTRACT

The collapse of the subprime market in early 2007 caused by the rapid rise in mortgage defaults resulted in banks and the government to shift their focus on saving homeowners from foreclosure and the possible loss of their home. While the default problem in the prime segment of the market is much less severe, the issues around how to keep borrowers in their homes affect all market segments, not just subprime loans. This paper addresses the causes and effects of the real estate market crisis and how it is beginning to turn around after almost 5 years with government intervention.

HISTORY OF THE MORTGAGE CRISIS

The U.S. subprime mortgage crisis was a set of events and conditions that led to a financial crisis and subsequent recession that began in 2008. On December 1, 2008, the National Bureau of Economic Research announced that the economy had entered into a recession in December of 2007. Real GDP increased by only 0.4 percent for the year 2008, and it decreased at annual rates of 5.4 percent in the 4th quarter of 2008 and 6.4 percent in the 1st quarter of 2009. The unemployment rate increased from 4.9 percent in December of 2007 to 9.5 percent in June of 2009. The Dow Jones Industrial Average (DJIA) reached a peak of 14,279.96 on October 11, 2007, and then fell to 6,440.08 on March 9, 2009, a drop of almost 55 percent from the peak. (Holt, 2009) The primary cause of the recession was the credit crisis that stemmed from the bursting of the housing bubble. It was characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of mortgage backed securities. These mortgage-backed securities (MBS) initially offered...