Revival of the Mortgage System
In the aftermath of the financial crisis of 2007-08, the market for mortgage backed securities (MBS) has come to almost standstill. The prime reason for this fall down was billions of dollars of write downs on mortgage loans by banks. Steady rise in defaults on mortgage payments and mounting unemployment rate too discouraged investors’ participation in the MBS market.
In view of these unfavorable conditions existed in the MBS market, investors on these securities insisted on higher returns. As a result, the spread between the MBS instrument and government securities reached historical highs. In order to revive the MBS market activities and to narrow down the spreads, Fed stepped in through open market operations.
General consensus is that tougher lending norms in the wake of mounting defaults in mortgage payments aggravated the crisis in housing market. This movement of banks was justified by the bleak prospects of repayment. As a result of this migration, most of the consumers were deprived of mortgage loans.
Higher interest cost also forced the consumers to postpone their home purchase decision. In view of these developments, demand for new homes dipped, casting a shadow for low house prices. The index developed by Fannie Mae, which measures home prices, indicated that home prices were down by 9% in 2008 and it was expected to fall down further in coming days.
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