Contributing Factors of the Recession

November 3, 2009 by  
Filed under Blog, Contributing Factors of the Recession

What Caused This Recession?

Of course, the banks contributed by making mortgages far too easy to acquire, and exercising little to no scrutiny over loan applicants, which led to bad mortgages running rampant.  It is easy to understand how this could happen when you take into account that charging applicants high fees, high pre-payment penalties, and the maximum allowable interest rates was all part of the lenders scheme to make as much money as possible from so many borrowers.

Further fueling this real estate frenzy were people, without any of the guidance, speculating in real estate. They saw home prices appreciating and decided to jump in for a quick buck.   With certain markets driving prices up tens of thousands per quarter, these inexperienced would buy new homes during pre-construction and even put together financing for sight unseen real estate purchases-all with the intent of selling before they ever had to make their first mortgage payment.

Banks would make poor loans and then sell these loans to other financial institutions and investors for profit.  Can you see how the incentive was to keep making more loans as fast as possible?  Risky mortgages were bundled into securities and sold on Wall Street.  Big funds, obsessed with getting a higher rateof return, ignored the risks.  These factors, followed by a lack of attention by the Federal Reserve, resulted in the creation of a “perfect storm”- and when the storm finally hit, it was an economic tsunami.

Housing Assist Coldwellbanker