The legislation provided taxpayers with rebates ($600 to $1,200), which they were encouraged to spend reduced taxes and increased the loan limits for federal home loan programs (for example, Fannie Mae and Freddie Mac). Bush signed the so-called Economic Stimulus Act into law. government did to combat the Great Recession and minimize its effects on the economy. Of course, lowering the target interest rate wasn’t the only thing the Fed and the U.S. By the end of 2008, the Fed had reduced the target interest rate to zero percent for the first time in history in hopes of once again encouraging borrowing and, by extension, capital investment. Interest rates were at 5.25 percent in September 2007. Federal Reserve (or “Fed”) began taking action, reducing the national target interest rate, which lenders use as a guide for setting rates on loans. With the American economy teetering, the U.S. Indeed, over the course of the Great Recession, the net worth of American households and non-profits declined by more than 20 percent from a high of $69 trillion in the fall of 2007 to $55 trillion in the spring of 2009-a loss of some $14 trillion. As a result, hundreds of thousands of Americans who had significant portions of their life saving invested in the stock market suffered catastrophic financial losses. Over the next 18 months, the Dow would lose more than half its value, falling to 6,547 points. However, that would mark the last bit of good news for the U.S. stock market reached its all-time high, as the key Dow Jones Industrial Average exceeded 14,000 for the first time in history. Interestingly, on October 9, 2007, the U.S. Standard and Poor’s also placed more than 600 securities backed by subprime residential mortgages on “credit watch.”īy then, as the subprime crisis continued, housing prices across the country began to fall, due to a glut of new homes on the market, so millions of homeowners-and their mortgage lenders-were suddenly “underwater,” meaning their homes were valued less than their total loan amounts. That summer, Standard and Poor’s and Moody’s credit ratings services both announced their intention to reduce the ratings on more than 100 bonds backed by second-lien subprime mortgages. became the second major mortgage lender to crack under the pressure of the subprime crisis and the declining housing market when it entered Chapter 11 bankruptcy. Just a few months later, in August 2007, American Home Mortgage Investment Corp. With no market for the mortgages it owned, and therefore no way to sell them to recoup their initial investment, New Century Financial collapsed. A couple of months earlier, in February, the Federal Home Loan Mortgage Corporation (Freddie Mac) announced that it would no longer purchase risky subprime mortgages or mortgage-related securities. housing market was still fairly robust at the time, the writing was on the wall when subprime mortgage lender New Century Financial declared bankruptcy in April 2007. These decisions, however, would soon prove catastrophic. And as housing prices continued to rise in North America and Western Europe, other financial institutions acquired thousands of these risky mortgages in bulk (typically in the form of mortgage-backed securities) as an investment, in hopes of a quick profit. With the housing boom in the United States in the early to mid-2000s, mortgage lenders seeking to capitalize on rising home prices were less restrictive in terms of the types of borrowers they approved for loans. Their home loans are considered high-risk loans. Subprime mortgages are home loans granted to borrowers with poor credit histories. The Great Recession-sometimes referred to as the 2008 Recession-in the United States and Western Europe has been linked to the so-called “subprime mortgage crisis.”
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