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Kanoe Ho
Christine Hansen
EN-102-90-2
Mortgage Bailout of 2008
What does $700 billion in impaired securities look like? To the United States treasury,
$700 billion is what was needed to save Wall Street and financial institutions across America. In
2008, the United States Department of Treasury decided to bailout banks which lead the United
States into a financial crisis. There are many parts that made up the financial crisis of 2008. In
actuality the 2008 mortgage crisis began in 2003 when decreasing interest rates attracted home
buyers to the housing market which created a housing boom (Docking, 354). This paper will
cover the history of the bailout, the main focus of each plan for the bailout, advantages
(successes) of each plan, disadvantages (failures) of each plan, and the effect and implications on
the economy.
The financial bailout of 2008 came about when there was a crisis that began to affect the
Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, the
two largest government sponsored mortgage enterprises (Ferguson, and Johnson 2). A large
meltdown had developed in the US mortgage market and it began to affect Wall Street
(Ferguson, and Johnson 1). The 2008 subprime mortgage crisis was caused by factors such as
the deregulation of the financial services industry, unexpected interest rate changes, lax and
imprudent lending, fraud fueled by greed, changes in financial accounting procedures, derivative
instruments, regulatory oversight, failure and a resulting housing market crash (Docking, 353).
Foreclosures had a large impact on financial institutions, the number of foreclosures were rising,
while financial institutions were incurring large losses (Holmes, 3). The housing market had
taken a significant hit, with the values of homes dropping. When the value of the homes was
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dropping, there was a growing amount of loans where the value of the home was less than the
balance on the mortgage. This is what began the mortgage crisis.
One of the many causes of the 2008 housing crisis was partially brought on by the
governments Community Reinvestment Act of 1977, which required financial institutions to
meet the credit and deposit needs in the communities where they were located, including low-
income neighborhoods. If a financial institution did not receive a satisfactory rating by the
Community Reinvestment Act, the banks daily business, any possible acquisitions and mergers
would be regulated and restricted (Docking, 353-354). With banks taking so much loss, they
were unable to lend out money, which caused a block in the financial system. The government
could not allow the United States financial system to fail, so they created the bailout plan.
During the 2008 election, the secretary of the US Treasury, Paulson, tried to cover the public
financial bailouts by recruiting other government agencies and the Federal Home Bank Loan
System to help service the bailout.
In the time of the mortgage crisis, many bankers and mortgage brokers were motivated
by greed (their large commissions) and were participating in predatory lending practices, such as
enticing borrowers into new secured mortgages that carried high fees, and interest rates knowing
that it would likely go into foreclosure (Docking, 354). Mortgage brokers were very eager to
make loans to people who either had no money or had insufficient income to pay back those
loans. Thus, the mortgage crisis had begun when the banks who originated these “bad” loans
would sell them to Wall Street Investment Banks. These securities were then sold to investors,
and unfortunately these overly enthusiastic investors were then faced with two unforeseen
problems, the credit ratings were inaccurate and they were unaware of the types of mortgages
that were backing those securities (Docking, 356).
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During the time of the crisis, the government had come up with a plan to save the United
States financial standing, and Fuhrer, along with colleagues, created an alternative Homeowner
bailout plan. The government’s plan to rescue financial institutions from imminent failure was to
acquire liabilities that were equal to 40 percent of the U.S. gross domestic product (Ferguson,
and Johnson 2). In July 2010, the United States Congress passed the Dodd-Frank Financial
Regulatory Act. This act was aimed at regulating financial markets (Pollin, 1). This act provided
a broad framework for implementing a new regulatory system. This act also allowed for many
critical details to be finalized at the various agencies, such as the Federal Reserve, the United
States Treasury, the Securities & Exchange Commission, and Commodity Futures Trading
Commission (Pollin, 1). Fuhrer’s bailout plan is designed to help homeowners who are unable to
afford mortgage payments on their principal residence because they have suffered significant
