The United States faced one of its biggest economic downturns of modern times due to the mortgage crisis of 2006. The crisis stemmed from a substantial decline in home prices, giving rise to mortgage foreclosures and delinquencies nationwide and helping to bring about a nationwide recession lasting from 2007-09. The recession resulted in a staggering nine million jobs lost for Americans, housing losing as much as 30 percent of its original value, and stock market shares losing an average of half of their value. Many analysts have credited the house bubble bursting to several contributing factors, including the actions of big mortgage brokers, such as Freddie Mac and Fannie Mae, and homeowners and overly lenient lending policies.
In the mid-1990s to early 2000s, home ownership was at an unprecedented high. The availability of subprime lending, loans made at higher interest rates to people with dubious credit, played a critical role in the house-building boom across the nation, creating greater demand for housing and driving prices ever higher. The average American home cost three times the amount of the average family income by early 2006, resulting in homeowners attempting to refinance their houses and apply for second mortgages. A majority of these high-risk loans were bankrolled by mortgage-backed securities.
Key participants in subprime lending included Freddie Mac and Fannie Mae, federal entities originally established to ensure affordable and reliable funding to borrowers. These two enterprises would purchase mortgage loans from banks, adding liquidity to the housing market, then repackage them into mortgage-backed securities that were sold to outside investors. In the event of a loan default, these two lending giants would guarantee timely principal payments. Similar to subprime loans, so-called "no-doc" loans, which required little or no documentation of income in order to borrow, emerged around this time as well, which cut out middlemen like Fannie and Freddie altogether. They featured low introductory rates that were short-lived.
After 2006, refinancing became increasingly difficult when prices for homes plummeted. The adjustable rates on loans that first appeared reasonable started to skyrocket, leaving borrowers with no choice but to default on their loans. Mortgage-backed securities started to fall in value, resulting in foreclosures nationwide. Top executives from Fannie and Freddie were charged with falsifying and withholding information, while many lending giants were charged with failing to disclose their billions of dollars in subprime loans to investors. Fannie Mae paid a record $400 million in civil fines in a settlement over misleading disclosures.
According to the director of the Securities and Exchange Commission's Enforcement Division, Robert Khuzami, "These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans and misled the market about the amount of risk on the company's books. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country's investors." In 2008, the federal government took control of the two major mortgage companies, pouring more than $150 billion into them in order to keep them solvent. In exchange, the government received stock in both enterprises.
Policies and laws went into effect over the years in the hopes of creating a more transparent housing market and fairer, more sustainable loans for borrowers. The federal Hardest Hit Fund distributed more than $7 billion to the 18 states hit hardest by the housing crisis, and laws such as the Community Reinvestment Act aimed to encourage banks to better meet the needs of their communities. In addition, the Home Affordable Modification Program (HAMP) was set up to help homeowners at risk of foreclosure. However, some analysts have predicted that another mortgage crisis could take place within the coming years, citing the expansion of Fannie and Freddie's role in the housing market and easing restrictions on the availability of credit.
