Explore BrainMass

Link Between Declining House Prices and Bank Failures

I need help in developing points for an assignment about the link between declining house prices and bank failures during the crisis of 2007-2009.

Solution Preview

So let's rewind back to the early to mid 2000s... At the time after 2001 the economy was in decline. September 11th and the dot-com bubble had burst. In response, to help stimulate the economy the Federal Reserve, AKA the Fed, lowered interest rates to near zero percent. These interest rates, called the federal funds rate, also helped bring down mortgage rates dramatically. Borrowing money to buy houses became cheap. Borrowing money with adjustable (as opposed to 30 year and 15 year fixed) rate mortgages became very cheap. An adjustable rate mortgage starts out with a lower teaser rates and then resets to market rates at some time in the future. As buyers rushed to move into these new houses prices of homes started to rise. It became universally accepted that a home was a great investment- you couldn't lose since prices were only going to go up! ...

Solution Summary

An essay on the impact of housing prices and interest rates leading up to the 2008 financial crisis and housing market collapse.