Could mortgage crisis have been prevented?

Mortgage Crisis – The cause

There is no one reason which can cause economic crisis of this magnitude. Given below is the list of happenings that led to the Mortgage Crisis.

• Even though the signs of a crippling economy were seen earlier, no body realized the magnitude of subprime mortgages that was built over a period of time. A secondary market for these mortgages made the banks overlook the impact of their failure.
• Loans were extended to borrowers who did not meet the requirements, making the possibility of their repayment almost impossible.
• Most of the homebuyers opted for interest only loans in order to reduce their monthly liability and with falling market prices, rising interest rates, they started defaulting unable to sell their houses at a profit.
• Sale of Mortgage Backed Securities (MBS) random stock bundle which was sold across to banks, pension and hedge funds together with individual investors.

The Federal Mediation

Housing losses where almost crippling the credit market. Banks where not lending each other literally fearing a bundle of bad stocks which required admitting their bad debt, which in turn will damage their credit rating, making it just impossible for them to stay back in business.

The Federal Reserve had to pump in money to increase the liquidity. When situation was no way better it realized the need for credibility and had to create a super fund for purchasing bad mortgages, but the timing was far too late.

The failed act of Prevention

The disaster of this great a magnitude could have been prevented had the mortgage brokers been properly regulated, stopping leveraging beyond limit by lending to all and sundry parties. And secondly recognizing a credibility issue much earlier and purchasing those bad mortgages would have certainly reduced the magnitude of the loss much in advance.