Bank of America and the Mortgage Crisis
Sharply rising mortgage foreclosure rates during the economic recession between 2007 and 2009 have drawn a significant amount of attention from scholars and policy makers. There has been an abundance of research probing factors, particularly sub-prime lending and neighborhood characteristics, contributing to foreclosures (Li). The present paper, investigated causes of the mortgage disaster with relevance to Bank of America. Bank of America is one of the major financial institutions affected and is losing money in the industry.
It is hypothesized that the bank and other financial institutions are still struggling in the industry, due to several reasons. The research question in this paper is: What led to the mortgage down fall since the recent recession that occurred in 2008.
In a research article by (Zhu, 2013), there are several causes of the sub-prime mortgage crisis. The author lists the following five contributing factors: The Federal Reserve abets the bubble, mortgage companies make loans perfunctorily, carefully packaged investment bank, hedge funds seeking income, Credit Company’s default assessment. It is hypothesized that because the Federal Reserve were afraid that the bursting of the internet bubble and other crisis events might lead the US economy into a prolonged recession, hence carried out a series of continued policies of interest rate cutting (Wolf and Ian, 2006). In low interest rate environment, the high price of homes promoted the prosperity of the real estate industry (Zhu, 2013). As the necessary supportive facilities, the mortgage companies and commercial banks increased in a geometrical progression, (Zhu, 2013). Premised by this situation, people who are living on relatively low incomes were able to meet their desire of housing despite their poor credit records and insufficient credit lines. Interests oriented mortgage companies and commercial banks snatched mortgage business with assorted productions and to some extent, massive sub-prime mortgage loans for houses which formed economy bubble (Zhu, 2013).Though the Federal Reserve’s low interest rate policy sustained the economic growth for a period of time, it also created superior inflation pressures and excess liquidity. Under the pressure of the growth demanding of interest rate rising, US real estate market appeared fatigued and weak and the default rates of housing loan, especially the sub-prime mortgage loan continued to rise, (Zhu, 2013).
The second cause, states that mortgage companies make loans perfunctorily, the US mortgage market mainly consist of Freddie Mac and Fannie Mae that are dominated by the government. Their primary business accounts for 70% of the US sub-prime mortgage market (Zhu, 2013). In the low interest rate environment, for the sake of gaining more clients, these two companies abandoned their original normative standards and established new loan types and loan standards independently and...