Tim Talmage

ECON 2020 402

Schumaker
April 27, 2015
Subprime Mortgage Crisis and U.S. Bailouts

The most common topic of the United States economic history of our current
century is primarily centered on the Subprime Mortgage Crisis and the eventual bailout
of the American financial system. Most citizens are well aware of the effects of the Great
Recession and the failure of our stock market, but do not truly understand the cause and
effect of each.
The beginning of the Great Recession has deep roots in the housing market. Over
the decades, financial institutions such local and multination banks, supported the
financing of average American citizen homes with relative ease. It was an easy method
for banks to see a return on investment and, for the most part, were had security in their
investment. Fannie Mae, the Federal Nation Mortgage Association, accepted the sale of
mortgages from bank if they needed funding. In return, banks and lender complied with
the terms in which Fannie Mae set. These terms specifically prohibited Red Lining, the
discrimination of high-risk housing location regardless of client credibility (The Nature
and the Origin of the Subprime Mortgage Crisis.). Once prohibited, Fannie Mae also
required evidential proof that lenders were not in fact Red Lining, ultimately leading to
an incredibly low standard of lending. In return, these subprime mortgages were charged

higher interest rates. In reality, most of the mortgages sold were clearly traveling down a
road to default, however, small banks and lenders knew that Fannie Mae would quickly
repurchase the mortgage and grant them a profit. Clearly the incentive behind every
transaction was the glisten margin of foreseeable income. Individuals who could not
technically afford homes found opportunity to obtain a home, despite their high interest
rate. When subprime borrowers across the nation began defaulting their mortgages, a
surge of houses began to enter the market. The overall market value of property dropped
so low that even homeowners in the prime-borrowing category decided to abandon their
mortgages. When housing values dropped lower than the face values of mortgages, it
seemed worthless to continue to make payments for many individuals. Fannie Mae was
not the only entity in existence but had a counterpart, Freddie Mac, to provide assistance
in a secondary housing market. Freddie Mac provided services such as insurance on
mortgages, collecting investors and diversifying investments providing a return on
revenue. Therefore, Freddie Mac had mortgage-backed securities on top of the purchases
of implicit junk mortgages. The combination ultimately led to the market downfall as
both Fannie Mae and Freddie Mac declared bankruptcy, devastating more than just one
simple market (The Nature and the Origin of the Subprime Mortgage Crisis).
The only response to the huge failure was for the government to re-stimulate the
loss in the form of a bailout. The Emergency Economic Stabilization Act of 2008 was the
Governments only answer to the problem. EESA enabled up to 700 billion dollars to be
pumped out of the Treasury to repurchase the junk mortgages and replenish money within

financial institutions (Washington Times). Considering the circular flow of money,

without a stimulus there would be no working capital in the economy. Job loss began
reaching an all time high and the nation was on the brink of depression. Like any other
crisis solution, the government created stronger regulations on lending and mortgages,
gave solutions to those who fell victim to the predatory housing lenders, and attempted to
ensure that bonuses were not to be paid out to CEOs financial gain during crisis.
America seemed to be crumbling at the time of the market failure with a reduction
of 8.4 million jobs and 6.1% of all payroll employment, marking the greatest loss since
the Great Depression (State of Working America). The combination of the housing bubble
burst and the decline of the stock market created struggling among the American people.
The pain and suffering of mass amounts of our civilized population can be attributed to
the capitalist mentality of our nation. The creation of debt allowed for immediate
opportunity by small time lenders selling to larger, government back agencies. Due to
improper regulation and false hopes, the ignorant consumers eventually dug a hole that
could not easily be refilled. The status of our great nation declined while CEOs and the
top percent of our economy attempted to cash out and receive bonuses essentially from
taxpayer, government funds. Scandals arose and fell, poverty became an epidemic and
once again the people of America fell victim to greed and inequality.
Since the end of the Great Recession in 2009, The United States is not fully
recovered. In 2014 the Huffington Post reported that 7 million jobs were needed in order
to be considered fully recovered. Since then, the GDP percentage proves that our

economy has been sluggishly recovering compared to prior Recessions and Depressions.
In the end, all we can do is hope that the greater good of humanity does not allow for
such tragic and greedy events to unfold in the future. However, if history has proven
anything, its that we are due to repeat ourselves in varying forms.

Works Cited
Fieldhouse, Andrew. "5 Years After the Great Recession, Our Economy Still Far from
Recovered." The Huffington Post. TheHuffingtonPost.com, n.d. Web. 30 Apr. 2015.
<http://www.huffingtonpost.com/andrew-fieldhouse/five-years-after-thegrea_b_5530597.html>.
"The Great Recession." State of Working America. N.p., n.d. Web. 30 Apr. 2015.
<http://stateofworkingamerica.org/great-recession/>.
"The Nature and the Origin of the Subprime Mortgage Crisis." The Nature and the Origin of
the Subprime Mortgage Crisis. N.p., n.d. Web. 30 Apr. 2015.
<http://www.sjsu.edu/faculty/watkins/subprime.htm>.
"Summary of the Emergency Economic Stabilization Act of 2008." Washington Times. The
Washington Times, n.d. Web. 30 Apr. 2015.
<http://www.washingtontimes.com/news/2008/sep/28/summary-emergency-economicstabilization-act-2008/>.