1.The American Dream

Owning a home is part of the 'American Dream'. It allows people to take pride in a property and engage in a community for the long term. However, homes are expensive, and most people need to borrow money to get one. The conditions were right for people to achieve that dream. In the early 2000s, mortgage interest rates were low, which allow you to borrow more money with a lower monthly payment. In addition, home prices increased dramatically, so buying a home seemed like a sure bet. Lenders understood that homes make good collateral, so they were willing to participate. The mortgage crisis was triggered as this situation-built momentum.

Easy credit was available in the United States in the years leading up to the crisis because significant inflows of foreign money allowed the Federal Reserve to keep rates low.Much of the influx of foreign money came from the booming Asian economies and oil producing nations.The low rates were exacerbated by modern financial instruments such as MBS and collateralized debt obligations (CDOs) that gave lenders extra incentive to make various types of loans available to consumers.As the risks associated with loan repayment (mortgages, credit cards, auto loans) were passed through to the investors in these instruments, it became easier for consumers to get loans and debt grew to unprecedented levels.The growth in the markets for these instruments also made it possible for investors all over the world to invest in, and therefore gain exposure to, the U.S. housing market. Major financial institutions around the world suffered major losses when home prices dropped due to their investments in the subprime MBS market.The vicious cycle of foreclosure and falling house prices started when home values dropped below the value of the outstanding mortgage.The crisis spread to other parts of the economy as asset values and consumer and institutional wealth decreased causing defaults to mount on other types of loans.Global losses across all loan types have been estimated to be in the trillions of U.S. dollars.

1.What were the contributing factors to The Mortgage Crisis?

2.How could the financial crisis be avoided?