Encouraging the boom in the U.S. real estate market between 2001-2006, banks and lending companies resorted to high-risk mortgage lending (French Archive).
The housing crisis is a serious financial crisis that suddenly surfaced, caused initially by a rush of banks to grant high-risk loans, and the crisis began to grow like a snowball to threaten the real estate sector in the United States and then the banks and global financial markets to pose a threat to the global financial economy.
How it happened?
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The boom in the U.S. real estate market between 2001-2006 encouraged banks and lending companies to resort to high-risk mortgage lending, granting borrowers loans without sufficient guarantees, and with significant risks in exchange for higher interest rates, aiming to achieve maximum profits for lending institutions.
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Major financial institutions expanded lending to real estate firms and contracting companies that exceeded seven hundred billion dollars.
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Rising interest rates led to a change in the nature of the U.S. market, represented by declining home prices and an increasing number of defaults on mortgage loans in the United States.
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Signs of the crisis surfaced clearly at the beginning of 2007, with increasing cases of default, a rise in foreclosure actions by lenders, and frequent confrontations between borrowers and banks.
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The volume of defaulted loans for individuals reached around a hundred billion dollars.
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The number of homes offered for sale in the United States increased by 75% in 2007, reaching 2.2 million, representing about 1% of all housing units in the United States.
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The ability of banks to finance companies and individuals weakened, leading to a decline in investment and consumer spending, threatening a recession.
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The connection of a large number of financial institutions, especially in Europe and Asia, to the U.S. financial market led the mortgage crisis from the United States to Asia and Europe, evolving into a larger crisis known as the global financial crisis.
Attempts to rescue:
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Global central banks in the United States, Europe, and Asia injected about $326 billion into their financial systems to protect the global financial system from collapse.
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The U.S. Senate approved a bill to protect property owners, providing $300 billion used by the Federal Housing Administration to refinance mortgage loans held by property owners.
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The Federal Reserve (U.S. central bank) decided to cut its basic interest rates by 0.75% in one go, reaching 3.5%, to address increasing disruptions in global financial markets. The rate was then gradually reduced to 2%.
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In Europe, the governments of the Netherlands, Belgium, and Luxembourg agreed to invest €11.2 billion in Fortis, a financial services company, effectively nationalizing it.
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Ten international banks agreed to establish a $70 billion liquidity fund to meet their urgent needs, while central banks agreed to open lending facilities.
Implications of the crisis:
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Bankruptcy of a number of U.S. mortgage lending companies such as New Century Financial Corporation and American Home Mortgage Investment.
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Many real estate companies resorted to laying off a large number of employees, including Countrywide, a major mortgage lender in the United States, which decided to lay off five employees, totaling 12,000 jobs to cope with about $1.2 billion in losses from the mortgage crisis.
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Between two and three million Americans face the risk of losing their homes.
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Merrill Lynch, the U.S. investment firm, incurred losses of $14.1 billion.
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Bank of America acquired Countrywide, the largest mortgage funder in the United States, for $4 billion, in a move to prevent one of the biggest collapses in America from occurring due to the housing crisis.
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Stock markets deteriorated amid the risk of the crisis widening, while several major banks announced significant declines in their stock prices.
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All European banks decided to freeze their operations in the U.S. real estate market, with BNP Paribas freezing investments worth $2.3 billion, the largest French-listed bank.
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Deutsche Bank suffered a loss estimated at $954.818 million.
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The British government nationalized Northern Rock, a mortgage finance bank, to prevent its bankruptcy, the first time a British company has been nationalized since the 1970s.
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JPMorgan Chase announced the acquisition of Bear Stearns, an American business bank, at a low price with financial assistance from the Federal Reserve.
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Citigroup sold $7.5 billion in bonds to Abu Dhabi's government investment authority.
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Credit Suisse, the Swiss bank, suffered record losses.
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The Japanese government announced that its financial institutions' losses due to the mortgage crisis doubled to $5.6 billion in the last three months of last year.