Role of US Mortgage Market Securitisation in the Credit Crunch and Global Financial Crisis

Housing Markets and Policy
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Executive Summary
For the years leading to the financial crisis, the US housing market was rife with cheap and easy credit to home owners who had poor credit histories. This was the first domino because more people could now afford homes rushed to secure mortgages. This drove the prices of homes high which came with higher repayment costs and saddled the borrowers with hefty premiums. On the other hand, the market securitization built on this risky market other securities that were tied to the housing market. The US housing market was the root of the financial crisis. The crisis was exacerbated by securitization mainly by the banking industry and other players like hedge funds. However, there are several ways in which the US mortgage market created the perfect fodder for the other industries to securitize the market.
The US mortgage market securitisation played a key role in causing the financial crisis through heavy securitization of the subprime mortgages. The market also relied on ratings were based on faulty assumptions and inadequate analysis, which resulted in a mispricing of risk CITATION Van10 \l 1033 (Gupta, Mittal, & Bhalla, 2010). Finally, the market was heavily interconnected and the contagion effect of the plummeting securities brought down the entire industry. This article also highlights that the financial crisis would still have happened even if the housing market was not securitized. There had been deregulation in the decades before the credit crunch and it created room for risky financial innovation that led to risky financial instruments within the framework of the law yet they could destabilize the markets. The financial system was weakened, making it vulnerable to a financial shock.
Introduction
In 2008, there was a severe economic downturn that started in the US and quickly spread to the rest of the world. The crisis had its roots in the US housing market where years of speculative property values coupled with easy credit and low interest rates eventually led to default and foreclosures CITATION Jos22 \l 1033 (Ryan-Collins, Llyod, & Macfarlane, 2022). Subprime mortgages were given to high-risk borrowers. The market also securitized these subprime mortgages using complex financial instruments and sold to investors. When the housing bubble burst, the complex financial derivatives faced massive losses and led to a credit freeze and liquidity crisis in the US financial system which led to a credit crunch all over the world.
The financial crisis would still have happened if the markets were not securitized. The issues that surrounded the financial crisis were beyond the housing market. There had been systemic deregulation of the industry in the decades and years following the crisis. This left room for financial instrument engineering and it is the main cause of the crisis CITATION Wat141 \l 1033 (Watcher, 2014). Housing market only served as the source of securities but an entire industry of securities was built on it. Therefore, while housing market caused the crisis, the banking industry would still have created complex financial instruments that would have found other products to securitize. The financial cri...