Douglas Foster

Govt 490
Homework #2
2-19-15
Mortgage delinquency and foreclosure rates in the United States in the second
quarter of 2014 had come down almost 50% to 8.53%1 from their height during the
financial crisis in 2009 of 14.4%. This drop can be attributed to the stricter conditions
surrounding lending in the United States. The federal government and financial
institutions have had an influence on these conditions, despite continued use of
financial instruments that helped contribute to the crash.
Collateralized Debt Obligations are being issued again by financial institutions to
investors who are looking for higher yields that the very low interest rates currently on
the market. The issuers of these securities, and the buyers, have a much lower
tolerance for risk now, though. The CDOs on the market now focus on safer debt that is
tied to commercial buildings and not to residential mortgages. The CDOs are now being
used to mitigate the risk of this debt, and not pooling all the risk into one security the
way that CDOs were made before 2008.2
Subprime mortgages are returning as well. These mortgages contributed to the
financial crisis in 2008. They were given out as adjustable rate mortgages with no down
payment and low introductory rates that went up significantly during the course of the
loan. Now the mortgages have much higher down payments and higher initial interest
1

Delinquncy and Foreclosure Rates Decrease in Second Quarter. Mortgage Bankers

Association. 8-7-14.http://mortgagebankers.org/NewsandMedia/PressCenter/89113.htm
2

CDOs Are Back: Will They Lead to Another Financial Crisis. Knowlege@Wharton. 4-10-13
http://knowledge.wharton.upenn.edu/article/cdos-are-back-will-they-lead-to-another-financialcrisis/

rates. These loans are much more difficult to get and are only backed by the Federal
Housing Authority. The FHA requires much stricter conditions and higher fees to give
one of these mortgages to a home buyer. This makes these loans less common and
less of a threat to the stability of the financial system.3
This lower rate of delinquency and foreclosure is also due in part the the federal
governments Troubled Asset Relief Program. TARP was most known for buying up
preferred stock for distressed banks and other companies to give them an infusion of
capital that would help them survive the crisis. The program also gave support to the
housing market to keep prices from falling too rapidly, and had provisions to help
homeowners. There was money allotted for refinancing homes that were underwater
through the FHA and a program that paid mortgage servicers to reduce the burden on
homeowners.4
Financial instruments that are blamed for the financial crisis of 2008 are still in
use. despite this the rate of mortgage foreclosure and delinquency has come down
significantly. The actions by private lenders and the government to support the housing
market and to ensure that more responsible lending occurs led to a significant drop in
the rate of mortgage foreclosure and delinquency.

Subprime Mortgages Making a Comeback. CNN Money. 3-21-14. http://money.cnn.com/

2014/03/21/real_estate/subprime-mortgages/
4

Webel, Baird. Troubled Asset Relief Program (TARP): Implementation and Status.
Congressional Research Service. 6-27-13. https://www.fas.org/sgp/crs/misc/R41427.pdf

Bibliography
Delinquncy and Foreclosure Rates Decrease in Second Quarter. Mortgage Bankers
Association. 8-7-14.http://mortgagebankers.org/NewsandMedia/PressCenter/89113.htm
CDOs Are Back: Will They Lead to Another Financial Crisis. Knowlege@Wharton.
4-10-13 http://knowledge.wharton.upenn.edu/article/cdos-are-back-will-they-lead-toanother-financial-crisis/
Subprime Mortgages Making a Comeback. CNN Money. 3-21-14. http://money.cnn.com/
2014/03/21/real_estate/subprime-mortgages/
Webel, Baird. Troubled Asset Relief Program (TARP): Implementation and Status.
Congressional Research Service. 6-27-13. https://www.fas.org/sgp/crs/misc/R41427.pdf