How Government Requirements for the Banking System to Provide Affordable Housing Led to a Global Economic Crisis Name:
In 2008 and 2009, the United States of America experienced an economic crisis and recession. This crisis resulted from unscrupulous lending practices, relaxed underwriting criteria, portfolios containing exotic mortgage products and under-supported homebuyer education, which yielded risky mortgages. The greatest contributor to this economic crisis and recession was the spreading out of these risky mortgages to unqualified borrowers. This paper discusses how the US government’s requirements for the banking system to provide affordable housing led to a global economic crisis. According to Liebowitz, the greatest mortgage crisis scandal is possibly that it directly resulted from intentional loosening of underwriting standards. This was with the objective of ending discrimination, despite warnings that it could culminate into extensive defaults. He explains that at the core of the financial crisis are loans, which were made with practically non-existing underwriting standards. In fact, there was no asset or income verification, no down payment and there was little consideration of the applicants’ ability to repay (1). Relaxed underwriting standards implied that there would be a considerable reduction or removal of assets, income, savings and credit history as well as the overall repayment capability from the equation. This is in addition to permitting products that avoided the criteria for basic good lending practices. Banks did not come up with the idea of loosening underwriting standards. The regulators, at ‘progressive’ political forces and community groups’ behest, loosened them. This encouraged lenders to offer products and underwrite loans impartially, irrespective of the borrower’s repayment capability and financial soundness (Liput, para4). Quite naturally, borrowers responded to the incentives that the new policies permitted them. This was irrespective of their socioeconomic status thus leading to the spread of risky lending to the wider mortgage market (Lucas, Para19). Apparently, borrowers spent money on houses whose value ended up being far below the loan. Consequently, they could not pay it back. Buyers used too much leverage as they used debt to increase gains, only to find that regrettably, it amplified losses instead. As a result, most banks either were near bankruptcy or became bankrupt. Due to globalization and currency integration such as dollarization, goods and services, stock and financial markets, trade and housing have close inter-connection globally, resulting into greater global interdependence. As one of the world’s largest economies, any slowdown in the economy of the United States will inexorably spread to other countries. This is exactly what happened leading to the rapid spread of ...