The document analyzes the key causes of the 2007-2008 housing bubble and financial crisis. It discusses several factors: 1) Government policies in the 1970s-2000s that deregulated lending standards in an effort to promote homeownership, making riskier loans more widely available. 2) Government-sponsored entities Fannie Mae and Freddie Mac came under pressure to purchase riskier loans to meet quotas, further spreading risky lending. 3) The Federal Reserve kept interest rates low in the early 2000s, fueling the bubble, then raised rates in 2004-2006, increasing foreclosures on adjustable rate mortgages. 4) Mortgage lenders aggressively targeted riskier borrowers with

1. The Housing Bubble Bust: The Second
Great Depression
Presented to Allan P Nuttall
By Angela Romero
1

2. INTRODUCTION
The 2007 subprime mortgage crisis led America into what is now called The Great Recession-- a
recession of epic proportions that has not been seen since The Great Depression. The subprime
mortgage crisis turned into a financial debacle because it demolished several pillars of America’s
economic infrastructure. The Great Recession was the result of loosely-knitted government
regulations, interwoven with greedy lenders, and voracious financial markets. For a crisis of this
magnitude to have happened, the cast of characters that created it must have had great power,
private agendas, and ravening greed. This report is going to examine the driving forces of the
housing bubble busts. This study was designed to analyze the mortgage meltdown. Specially, this
study wants to answer the following questions:
Who were the key players in the mortgage meltdown?
What were their motivations?
Why they behaved as they did?
Figure 1: Housing Bubble Formation depicts the main forces and key players driving the housing
bubble.
Figure 1: Housing Bubble Formation
Causes of the Housing Bubble
Institutional Lending Decisions Personal Borrowing Decisions
GSE Irresponsible Low Wall MBS
Risky Lending Interest Street’s Credit Risky Home Bubble High
Practices Practices Rates MBS Ratings ARM ownership Psychology Household
Loans Pressure Debt
Source: Primary, 2011
2

3. THE GOVERNMENT
This section is going to cover the cultural pressures and the governmental influence on the
housing bubble. Before the 1960s, only creditworthy individuals who fit the strict requirements
of lenders would get approved for a mortgage loan. Since the underwriting standards were so
strict, a big sector of the population did not qualify for loans. The Boston Fed made a study
investigating lending practices because of the large quantity of loans denied. The results of the
study suggested that Lenders were ―redlining‖, which is the practice of denying loans to
minorities and economically distressed communities, regardless of their ability to pay. In other
words, it is a deliberate discrimination on lending practices towards minorities and low-income
citizens. The study caused an uproar among people who demanded to be protected from
discriminatory lending practices. Further, the media sensationalized the story out of proportions,
fuelling the heated issue even further. Together, communities and the media pressured the
government to respond.
The Boston Fed study was the spark that ignited a government-driven engine towards the road of
looser underwriting standards. The government realized that housing ownership was a powerful
campaign that would increase votes and popularity. Swiftly, most politicians from left to right,
took the ―affordable housing‖ motto as an emblem for their campaigns. For example, in 1996
President Clinton started its ―National Homeownership Strategy‖. According to the Washington
examiner, this campaign was the seed of the Great Recession ―the roots of this crisis sprouted
during the Clinton administration’s politically motivated effort in the 1990s, to use Fannie Mae
and Freddie Mac to expand home ownership‖ (Washington Examiner 1)
Not all the pundits agreed with the redlining accusations made by the Fed. According to
Liebowitz, the Boston Fed’s study was flawed and it was a smokescreen released in order to
achieve relaxed underwriting standards. ―My colleague, Ted Day, and I only decided to
investigate the Boston Fed study because we knew that no single study, particularly the first
study, should ever be considered definitive and that something smelled funny about the whole
endeavor. Nevertheless, we were shocked at the poor quality of the data created by the Boston
Fed… When we attempted to conduct statistical analysis removing the impact of these obvious
data errors, we found that the evidence of discrimination vanished‖ (Lebowitz 1). Despite the
accuracy of the study, the government enacted several laws to protect consumers against
redlining.
The Community Reinvestment Act of 1977
The first legislation enacted to protect borrowers against discrimination and to increase rate of
ownership among minorities was the Community Reinvestment Act of 1977. ―The CRA is a
United States federal law designed to encourage commercial banks and savings associations to
help meet the needs of borrowers in all segments of their communities, including low- and
moderate-income neighborhoods‖ (Bankers Academy 1). In a practical way, this Act requires
banks to lower their lending standards to accommodate less-than-perfect or subprime borrowers.
Further, under CRA legislation, it was made possible to pursue legal actions against banks that
continued with discriminatory lending practices. ―The regulators imposed quotas— and lenders
had to resort to ―innovative or flexible‖ standards and methods to meet those quotas‖ (Sowell
39).
3

4. Closing the Gap: A Guide to Equal Opportunity Lending
The Boston Fed published a manual for lending institutions called ―Closing the Gap: A Guide to
Equal Opportunity Lending‖ (Boston Fed 1) that addressed the new lax underwriting standards.
This section is going to analyze excerpts from the manual and its consequences on lending
practices. For example, the new obligation ratio stated that it is acceptable to lend to people who
have an income-to-debt ratio lower than the golden standard of 28/36. “Obligation Ratios: it
should be noted that the secondary market is willing to consider ratios above the standard 28/36‖
(Boston Fed 1). What this means is that the secondary mortgage market is willing to purchase
riskier loans in order to boost home ownership. Second, not only is the manual lowering the
debt-to-income ratios, which removes any type of cushioning in case of an emergency, but it is
lending to people with no payment history ―Credit History: Lack of credit history should not be
seen as a negative factor… For lower–income applicants in particular, unforeseen expenses can
have a disproportionate effect on an otherwise positive credit record‖ (Boston Fed 1). Lastly,
“Sources of Income: In addition to primary employment income… the following are valid
income sources: overtime and part–time work, second jobs (including seasonal work), retirement
and Social Security income, alimony, child support, Veterans Administration (VA) benefits,
welfare payments, and unemployment benefits‖ (Boston Fed 1). The problem with this statement
is that part time jobs, secondary jobs, and child support are not valid sources of income because
they are not stable.
By lowering the underwriting standards, the government prompted lending institutions to make
riskier and unsound investments. ―Although the Community Reinvestment Act had no
immediate impact, over the years its underlying assumptions and provisions provided the basis
for ever more insistent pressure on lenders from a variety of government officials and agencies to
lend to those whom politicians and bureaucrats wanted them to lend‖ (Sowell 37). Further, the
CRA was a dynamic piece of legislation that was modified throughout different presidencies and
used as banner of political propaganda. For example, George Bush, who was notorious for
deregulating the mortgage market, in his 2002 Presidency speech said ―it starts with setting a
goal. And so by the year 2010, we must increase minority home owners by at least 5.5 million…
We certainly don't want there to be a fine print preventing people from owning their home…We
can change the print, and we've got to‖( The white House President George W Bush 1). The last
phrase ―we can change the print, and we’ve got to‖ (The white House President George W Bush
1), portrays the essence of governmental deregulation on underwriting standard as a political
strategy. Figure 2: Outstanding Mortgage Debt shows the residential mortgage debt and the
property values from 1997 to 2009. As we can see from the graph, there is a spike in the 1980s
following the CRA law enactment. This spike reflects the profound effect the CRA enactment
had in lending practices.
4

5. Figure 2: Outstanding Mortgage Debt
Source: Seeking Alpha, 2009
Another example of how governmental deregulation fuelled the mortgage crisis was when Bill
Clinton passed the Gramm-Leach-Bliley Act, commonly known in as the Financial Services
Modernization Act, which repealed the Glass-Steagall Act. The Glass-Steagall Act prevented
companies from consolidating because of possible conflict of interest that could adversely affect
consumers. This new law makes it possible for investment banks, depository banks, and
insurance companies to merge as one corporation. As a result, banks like Citicorp merged with
insurance companies, such as Travelers. Corporate mergers of this magnitude have a deep effect
on the economic fabric of America. However, the Great Recession can’t be explained only by
governmental deregulations in lending practices, there are other characters that came into play.
5

6. THE EVIL TWINS: FANNIE MAE AND FREDDIE MAC
The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation,
colloquially known as Fannie and Freddie Mac, are Government-Sponsored Enterprises or GSEs.
A GSE is a hybrid entity of governmental sponsorship with private ownership. Their main goal
is to supply the mortgage industry with a constant stream of cash. The government created these
GSEs to start a secondary mortgage market, which would smooth out wrinkles of the cashed-
strapped lending industry. Before the secondary mortgage market creation, banks had to wait up
to 30 years to recover their investment. As a result, the economy suffered periods of cash
droughts and credit crunches. Further, the cash strapped banks couldn’t lend money, which
meant they could not make money and some were forced into bankruptcy. As a solution, Fannie
and Freddie Mac purchase these mortgages from banks, replenishing the bank’s cash reserves
and starting the lending cycle again. The GSEs, then securitize these mortgages and sell them to
investors in the form of bonds called mortgage-backed securities or MBS.
Furthermore, there were several pressures that caused the GSEs to lower the underwriting
standards of the loans they will purchase. First, during the 1990s the Clinton and Bush
Administrations loosened credit standards in order to increase affordable housing for
economically distressed communities, as we saw in the previous section. Also, the Department of
Housing and Urban Development HUD, imposed quotas on the amount of low-income
mortgages the GSEs had to purchase. In turn, the GSEs lowered the underwriting standards in
order to meet those quotas. The lowering of the underwriting standards opened the market for
subprime loans. "Fannie Mae is taking on significantly more risk, which may not pose any
difficulties during flush economic times. But the government-subsidized corporation may run
into trouble in an economic downturn, prompting a government rescue similar to that of the
savings and loan industry in the 1980s‖ (The New York Times 1).
Furthermore, Fannie Mae and Freddie Mac were forced to compete with private label MBS
issued by Wall Street’s investment banks. This external pressure imposed a further loosening of
the credit requirements. As a result, Fannie and Freddie overextended themselves taking on too
much debt without the appropriate cash reserves in case of an economic downturn. ―The CEO of
Fannie Mae Franklin Raines…pointed out that Fannie Mae had ―amassed over $30 billion of
private equity capital to finance $2 trillion of mortgages today‖. He did not address the critic’s
charge that it was precisely this high ratio of business done to the amount of capital available, to
cover any problems that might arise, which posed a major risk to Fannie Mae and to the
financial system‖ ( Sowell 53)
Fannie and Freddie eventually capsized under the weight of their own debt. The government
intervened by giving the GSEs access to low-interest loans from the Fed’s reserves and
authorized the Treasury to purchase the GSEs’ stock. Despite of the government’s efforts to
boost the GSEs’ financial health, their stock price plummeted more than 90%. ―On Oct 21, 2010
FHFA estimates revealed that the bailout of Freddie Mac and Fannie Mae will likely cost
taxpayers $224–360 billion in total, with over $150 billion already provided‖ (Tucson Sentinel
1). The financial troubles of these giants weren’t enough to cause the mortgage meltdown, so we
are going to analyze other sections of the economy that contributed to the crisis
6

7. THE FEDERAL RESERVE BANK
The Federal Reserve Bank, Fed, was another protagonist of the mortgage crisis. The Fed is an
independent central bank that controls America’s monetary policies through three tools.
Open market operations-- it trades U.S Government securities in the open market.
Discount rate— sets the interest rate charged to banks for overnight transactions.
Reserve Requirements— sets the amount of money that banks must hold in their reserve.
Through these mechanisms the Fed controls the money supply and the overall direction of the
economy. Furthermore, the discount rate or Federal Funds Rate has a direct effect on the amount
of money supply that is in the economy. For example, a contractionary monetary policy sets
interest rates high, which means that money becomes expensive. During this phase, the money
supply becomes scarce, hindering lending. On the other hand, an expansionary monetary policy
sets discount rate is low, which means that money becomes inexpensive. This increases the
money supply and fosters lending. Figure 3: Federal Fund Rate Graph shows the interest rates
from 1952 to 2012.
Figure 3: Federal Funds Rate Graph
Source: Serc Carletonu, 2011
Furthermore, the technology bubble in the mid 1990s and the mortgage bubble in the mid 2000s
are perfect examples of expansionary monetary policies. The low interest rates during the mid-
1990s and mid-2000s depicted in figure 3 stimulated the economy to the point of creating a
bubble. For example, when the Federal Funds Rate is low, outstanding mortgage debt is high. As
illustrated by comparing Figure 2: Outstanding Mortgage Debt to Figure 3: Federal Funds Rate
Graph. For example, there is only 1.75 trillion Dollars on outstanding mortgage debt when the
discount rate is 18%. On the contrary, during the 1990s there is significant growth in mortgage
debt, up to 4 trillion Dollars, when the discount rate was 4%. Finally, there is an unprecedented
boom in the mid-2000s of 15 trillion Dollars in mortgage debt when the discount rate was about
1%, a rate never seen since the 1950s.
7

8. During an economic downturn, the Fed lowers the discount rate in an effort to jumpstart the
economy, by providing cheap capital for investments. The tech bust created a recession in the
American economy, the Fed sought to alleviate it by stimulating the construction and the housing
industry. ―Fed officials conspicuously pinned their hopes for an economic recovery at least
partly on the housing sector… With technology companies decimated by the collapse of their
stock prices … housing, it appeared, it was the only game in town‖ (Andrews 72). The Fed
pursued an expansionary policy that revived the American economy for half a decade.
The Fed’s biggest blunder was to raise the Federal Funds Rate from 1% to almost 5 % between
mid-2004 and mid-2006, in intent to slow down inflation. This hike in interest rates increased
foreclosures because most of the loans being made were adjustable rate mortgages. ARMs are
pegged to an economic index that fluctuates with the Federal Funds Rate. Raising the discount
rate made the ARMs payments unaffordable, forcing a major sector of homeowners into
foreclosure.
Lastly, Alan Greenspan, then President of the Fed, didn’t act to prevent the meltdown from
happening. ―The Federal Reserve could have stopped this problem dead in its tracks…if the Fed
had done its job, we would not have had the abusive lending and we would have a foreclosure
crisis‖ (Andrews 78). The Fed oversees state chartered banks and under that jurisdiction, it
could have stopped irregular lending practices. Also, there were several pundits that warned the
Fed from an imminent housing bubble and its dreading consequences. However, the Fed kept
low interest rates, which fueled the housing bubble.
Furthermore, Greenspan reported that derivatives such as, Mortgage-backed securities and credit
default swaps were safe for the economy and should not be regulated. As a result, under the
Commodity Futures Modernization Act of 2000, the government deregulated such derivatives
making it impossible for oversight agencies to control those financial instruments. Despite the
Fed’s actual intentions, its policies blew the housing bubble beyond proportions exacerbating the
economic downturn
8

9. GREEDY LENDERS
As we saw in the past section, the government enacted laws that deregulated underwriting
standards. Soon, the mortgage industry had a myriad of risky complex loans offered to the
public, also known as ―creative financing strategies‖. In particular, the industry targeted
borrowers with bad credit scores or uncertain income streams, the subprime market. Subprime
mortgages are attractive to lenders and investors because they generate higher profits. Lenders
did not limit their creativity to subprime loans. For example, loan officers offered No Income No
Assets loans, called NINA, to unqualified individuals. These ―liar loans‖ were originally
designed for independent contractors whose income greatly differs from their IRS tax returns.
Independent contractors can write-off many business expenses to lower their income, but in
reality they have earned a substantial amount of money. However, lenders got creative and
started to offer these loans to people who weren’t independent contractors and whose real
income was stated in their tax returns. ―Loans that require little or no documentation of income
soared to $276 billion, or 46 percent, of all subprime mortgages last year from $30 billion in
2001, according to estimates from New York- based analysts at Credit Suisse Group.
Homebuyers with those loans defaulted at a 12.6 percent rate in February, compared with 1.5
percent of fully documented prime mortgages‖ (Bloomberg 1)
Adjustable Rate Mortgages
Furthermore, lenders offered Adjustable Rate Mortgages to subprime borrowers because of their
complex structure and seemingly low interest rates. Research has shown that many subprime
borrowers did not understand these types of loans, which caused them to default at a higher rate.
An ARM loan has many components that interact with one another. For example, an ARM loan
offers a low introductory rate of 1%. Also, the loan is tied to an underlying economic index,
which fluctuates with the economy. In addition, the lender charges a profit, called margin.
Lastly, ARM loans take an adjustment period to become fully indexed. The fully index rate, FIR,
is equal to the rate of economic index plus the lender’s margin. As this wasn’t confusing enough,
this loan gives different paying options. A borrower can choose to pay interest only, a minimum
payment, or payment in full each month. When borrowers pay interest only, negative
amortization happens. Neg-am means that if a borrower pays the minimum payment, the
remainder of what the payment should have been will be added to the original principal owed.
This process results in compounding interest, which means that the borrower will pay more than
what was owed originally. ―The flexible payment or "option" ARM, which grew rapidly in
popularity during the housing bubble of 2003-2006, had an initial rate period of one month. It
was a favorite instrument of hucksters because they could advertise rates as low as 1%. The
FIR… was seldom volunteered‖ (The Mortgage Professor’s Website 1)
The majority of borrowers that used ARM loans to finance their homes were subprime; however,
prime borrowers used them as well. For example, Figure 4: Average Credit Score of Borrowers
shows that people with low credit scores used ARMs loans more than people with good credit
scores.
9

10. Figure 4: Average Credits Score of Borrowers
S
o
Source: LoanPerformance ABS Securities, 2011
Also, Figure 5: Loan Defaults Forecast shows that out of 55 billion Dollars in loans that were
expected to default, 44 billon dollars were from subprime mortgages. Asides from the fact that
non-sophisticated and low-income borrowers got lured in to a loan that they count afford by a
teaser rate, during 2005 the Fed raised the discount rate. As a result, the interest rate charged on
ARMs loans surged, causing a tsunami of defaults and foreclosures. ―Option ARMs were
exquisitely designed to exploit the worst excess of the housing bubble. Hey were perfect for fast-
buck speculators, perfect for deceiving unsophisticated borrowers, and perfect for luring people
with income into dream houses they could not possibly afford‖ ( Andrews 49). Lastly, the
government could have stepped in and stopped these types of loans, but instead it said that ARM
loans were fine as long and they were immediately sold to an investor.
10

11. Figure 5: Loan Defaults Forecast
Source: Bank of America Estimates Based on LoanPerformance data, 2011
11

12. WALL STREET GAMBLING: IN A SHADOW BANKING UNIVERSE
The primary mortgage market is composed of an institutional bank, which lends money to the
consumer. After getting money from depositors, banks lend that money at a higher interest rate
to make a profit. Banks encountered liquidity problems after making too many loans because
they had to wait 30 years to be repaid or wait for more deposits from people. The government
created the secondary mortgage market to smooth out the economic bumps that cashed-strapped
banks caused.
The secondary mortgage participants— Federal National Mortgage Association or Fannie Mae,
Federal Home Loan Mortgage Corporation or Freddie Mac , and the Government National
Mortgage Association or Ginnie Mae—then sell those mortgages as securitized debt instruments
called mortgage-backed securities. The mortgage-backed securities, MBS, are financial
instruments created and issued first in 1968 by Ginnie Mae. Ginnie Mae’s MBS are based on
FHA and VA mortgages and have explicit support from the U.S government. On the other hand,
Fannie Mae and Freddie Mac sell MBS of private mortgages, which aren’t backed by the U.S
government.
The MBS are debt instruments with an underlying pool of loans that were sliced, and repackaged
to be sold as bonds. The investors who purchase the bonds receive mortgage payments from the
original borrower. These investors were absorbing most of the risk because they would be
receiving the payments from the original borrower and in case of default they would lose on their
investment. On the contrary, institutional banks, which originated the loans, are secured because
they will get their money back from the secondary mortgage market.
The mortgage business was booming and the private sector wanted to get their share. As a result,
investment banks such as the Lehman Brothers and Solomon invented on its own kind of MBS,
―private label MBS‖. The invention of the private MBS was a milestone for Wall Street. Exotic
financial instruments called derivatives arose from the creative and greedy minds of this part of
town. The trading and speculating of these derivatives caused an unprecedented bubble in the
financial sector, which busted when the underlying loans on those derivatives defaulted.
―Investors purchased more than $60 billion of private-label (non-GSE) subprime mortgage-
backed securities, six times more than 1991's volume of $10 billion‖ (U.S. Department of
Housing and Urban Development 1).
Figure 6: Mortgage-Backed Securities by Entity shows the market share distribution of the
MBS. From 1995 to 2000s, Fannie Mae and Freddie Mac were the main players, purchasing
about 60% of all mortgages. After 2003, the private label MBS took over the market with a
maximum market share of 60%. From 2003 to 2007, private label MBS dominated the market
because they were not regulated by the government. Furthermore, the 2007-2010 stock market
crash is represented in this graph by a sharp decline in MBS market share from the Wall Street’s
firms.
12

13. Figure 6: Mortgage-Backed Securities by entity
Source: Congressional Budget Office Based from the Securities Industry, 2011
Securitization Patterns
To understand how the private label MBS work, we are going to analyze the process of loan
securitization. Investment bankers securitize a pool of mortgages by dividing them into tranches,
French for slices. Each tranche level represents different levels of risks. A bond rating of AAA
means zero risk, while a rating of BBB means higher risk. In theory, the expected return goes up,
as you go down the tranches. Financial analyst had to work with credit rating agencies to ensure
that these MBS had good ratings, otherwise investors wouldn’t purchase them. To sell the
bottom riskiest tranches, bankers invented— High Grade Collateralized Debt Obligations,
mezzanine CDOs, and CDOs 2 to mask their risk. Figure 7: Securitization Pattern of Mortgage-
Backed Securities depicts the securitization pattern of subprime mortgages mentioned above.
13

14. Figure 7: Securitization Pattern of Mortgage-Backed Securities
S
S
Source: Bionic Turtle, 2011
Wall Street didn’t stop its creativity there, bankers created credit default swaps, synthetic CDOs,
Bistros and many other complex derivatives that in the words of many pundits, not even a P.H.D
in finance and mathematics would understand. In fact, Credit Defaults Swaps, CDS, which are
insurance derivatives in case of default, caused the collapse of insurance giant AGI.
Furthermore, the big five investment banks-- Goldman Sachs, Bear Stearns, Merrill Lynch,
Morgan Stanley, and Lehman Brothers – persuaded the Securities Exchange Commission to lax
its long standing regulation on the amount of debt they could take on. This legislation fuelled the
financial boom because it suspended the net capital rule. The net capital rule legislation limits a
bank’s ability to take on debt and establishes a minimum reserve requirement of capital to cover
its assets during bad economic times. The loosening of the net capital rule freed up money,
which was invested in risky MBS and related derivatives. Furthermore, ―In loosening the
capital rules, which are supposed to provide a buffer in turbulent times, the agency [S.E.C] also
decided to rely on the firms’ own computer models for determining the riskiness of investments,
essentially outsourcing the job of monitoring risk to the banks themselves‖ (New York Times 1).
There were warnings from wise people in the business to stop MBS trading in Wall Street. For
example, Lewis Ranieri, the co-inventor of the MBS, warned the public about danger of these
new mutant breed of MBS ―Wall Street had gone gaga securitizing subprime mortgages without
paying much attention to quality‖ (Muolo 216). Also, Bill Ackman, founder of Pershing Square
Capital, predicted that when the investors realized they had been deceived, there would be an
economic debacle. ―[Bill] Ackman accused Wall Street of fueling the binge by turning risky
…The danger was that the whole process would abruptly reverse‖ ( Andrews 122)
14

15. Credit Rating Agencies
Standard & Poor’s and Moody’s, rated most of these MBS as investments grade bonds from
AAA to BBB. As a comparison, Treasury Bills have a rating of AAA, which basically means
zero risk of default. The credit rating agencies were criticized for giving these new breed of
securities such a high rating without proper knowledge of their true risk.
As a result of the increase in defaults, the credit rating agencies had to lower the rating of many
MBS. For example, on July 10th 2007, Standards and Poor’s downgraded 612 MBS from
investment bonds to junk bonds. Also, Moody’s downgraded 399 securities during that same
period of time. This event was the first domino to tumble creating a chain reaction leading to the
mortgage meltdown. The downgrades caused widespread panic in the stock markets. The
increase in defaults and the unstable economic environment caused by the change in bond ratings
opened the door to the stock market crash of 2007- 2010. Figure 8: Market Crash of 2007-2010,
depicts the sad reality of the Great Recession.
Figure 8: Market Crash of 2007-2010
Source: Markit: Financial Information Services, 2010
As mentioned before, the Fed raised the Federal Funds Rate on 2005 causing the ARM interest
to soar, which in turn created a Tsunami of foreclosures. As a result, home prices dropped
causing borrowers to become upside down or owe more than they had in equity, increasing
foreclosure rates even more. After borrowers started defaulting at increasing rates, the price of
the MBS plummeted, causing a stock market crash. After the stock market crash of 2007, the big
five investment banks failed. Bear Sterns and Merrill were sold at a bargain to other banks. The
Lehman Brothers filed for bankruptcy. Goldman Sachs and Morgan Stanley converted into
heavily regulated depository banks. The stock market crash and the tsunami of defaults was
catastrophic economy because two of its strongest pillars were blown one after another.
15

16. CONCLUSION
The Great Recession was caused by a systematic fail of all components of society. Conflicting
private agendas generated a free for all business environment in which the powerful abused the
week and swindled the rest. The government failed to protect the consumer and regulate the
business environment. The mortgage industry failed to be ethical in its lending practices, ending
with major bankruptcies and corruption scandals. The financial banking industry created a time-
bomb that wiped out five of its biggest investment banks and crashed its precious stock market.
When the economy went awry, banking institutions received a big hand from the government,
while ex-homeowners were left with nothing.
16

17. References
Andrews, Edmund. ―Busted: Left Inside the Great Mortgage Meltdown‖. London: Norton & Company,
2009.
Bankers Academy (2011). Community Reinvestment Act:. Retrieved July 2011 from
http://www.bankersacademy.com/regulations/lending-acts.php
Britner, Richard. ―Confessions of a Subprime Lender: An insider’s Tale of Greed, Fraud, and
Ignorance‖. New Jersey: Wiley Books, 2008.
Dewitt, Anthony. (2011, July 25). Close to half of all Az mortgages are 'underwater'. The Tucson Sentinel.
Retrieved July 2011 from
http://www.tucsonsentinel.com/local/report/072511_underwater_mortgages/
Federal Reserve Bank of Boston (1993). Closing the Gap: A Guide to Equal Opportunity Lending.
Retrieved July 2011 from http://www.bos.frb.org/commdev/closing-the-gap/closingt.pdf
Holmes ,Steven. (1999, September 30). Fannie Mae Eases Credit To Aid Mortgage Lending. The New
York Times. Retrieved July 2011 from http://www.nytimes.com/1999/09/30/business/fannie-mae-
eases-credit-to-aid-mortgage-lending.html
Ivry, Bob.( 2007, April 25). Subprime `Liar Loans' Fuel Bust With $1 Billion Fraud . Bloomberg.
Retrieved July 2011 from
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aN2DPRuRs93M
Liebowitz, Stan (2009). Anatomy of a Train Wreck: Causes of the Mortgage Meltdown. Retrieved July
2011 from ttp://johnrlott.tripod.com/Liebowitz_Housing.pdf
Michaelson, Adam. ―The Foreclosure of America‖. New York: Berkeley Books, 2009.
Muolo, Paul. ―Chain of Blame: The Truth Behind America’s Housing and Mortgage Crisis‖. New Jersey:
Wiley Books, 2008.
Sowell, Thomas. ―The Housing Boom and Bust‖. New York: Basic Books, 2009.
The New York Times (2008).The Reckoning; Agency's '04 Rule Let Banks Pile Up New Debt, And Risk.
Retrieved July 2011 from
http://query.nytimes.com/gst/fullpage.html?res=9D05E2DA143EF930A35753C1A96E9C8B63&
pagewant
The Mortgage Professor’s Website(2011). The Fully Indexed Rate: Better Know What It Is. Retrieved
July 2011 from http://www.mtgprofessor.com/A%20-%20ARMs/the_fully
indexed_rate_what_you_ don%27t_ know_can_hurt_ you.htm
The White House President George W Bush (2002). President Calls for Expanding Opportunities to
Home Ownership Retrieved July 2011 from http://georgewbush-whitehouse.archives.gov/
Washington Examiner (2008). Roots of financial crisis in Clinton housing policy. Retrieved July 2011
from http://washingtonexaminer.com/opinion/roots-financial-crisis-clinton-housing-
policy#ixzz1Tue61P9v
17