The US Housing Market and the Subprime Mortgage Crisis (A)


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Case Details:

Case Code : BENV014
Case Length : 21 Pages
Period : 2001-2007
Pub Date : 2008
Teaching Note :Not Available
Organization : -
Industry : Financial Services
Countries : USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

Background Note

The history of the US mortgage market dates back to the late 18th century. Some of the first organizations in the US housing market were the Terminating Building Societies (TBSs). Under TBSs, a group of people pooled their savings to construct houses. As each house was completed, the members would draw lots to select who would receive the house.

This process was repeated until every member owned a house. The members of the group also shared credit and funding risks. If one of the members failed to repay his loan , then his property was transferred to another member who was willing to repay the loan...

The US Mortgage Market in the Early 2000s

In the 2000s, with the changing market structure, new types of mortgages replaced fixed rate mortgages (FRMs) as the most popular mortgage loan. Many non-traditional mortgages were introduced in this period. Some of these allowed borrowers to postpone payment of principal and, some even allowed the postponement of interest payment (Refer Exhibit III for more about different non-traditional mortgage loans)...

The Crisis

By mid-2004, house prices in the US had appreciated steeply.

Sensing the formation of a ‘bubble’, the Federal Reserve began raising interest rates gradually, so as to prevent a sharp downturn in the housing market which it was feared could lead to a recession just as the bursting of the dotcom bubble in 2000 had contributed to the subsequent recession of 2001-02. Between June 2004 and July 2006, interest rates were increased 17 times, from 1 percent to 5.25 percent (Refer Table I)...

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