Derek D'Angelo's List: Financial Crisis

• An increase in loan incentives such as easy initial terms and a long-term trend  of rising housing prices had encouraged borrowers to assume difficult mortgages  in the belief they would be able to quickly refinance at more favorable terms.
• However, once interest rates began to rise and housing prices started to drop  moderately in 2006–2007 in many parts of the U.S., refinancing became more  difficult.
• Falling prices also resulted in homes worth less than the mortgage loan,  providing a financial incentive to enter foreclosure.
• This inflow of funds combined with low U.S. interest rates from 2002-2004  contributed to easy credit conditions, which fueled both housing and credit  bubbles.
• mortgage-backed securities (MBS)
• Such financial  innovation enabled institutions and investors around the world to invest in  the U.S. housing market.
• These institutions as well as certain regulated banks had also assumed  significant debt burdens while providing the loans described above and did not  have a financial cushion sufficient to absorb large loan defaults or MBS  losses.^[9] These losses  impacted the ability of financial institutions to lend, slowing economic  activity.

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