File:Subprime crisis - Foreclosures & Bank Instability.png

From Wikimedia Commons, the free media repository
Jump to navigation Jump to search

Original file(960 × 720 pixels, file size: 16 KB, MIME type: image/png)

Captions

Captions

Add a one-line explanation of what this file represents
This diagram image could be re-created using vector graphics as an SVG file. This has several advantages; see Commons:Media for cleanup for more information. If an SVG form of this image is available, please upload it and afterwards replace this template with {{vector version available|new image name}}.


It is recommended to name the SVG file “Subprime crisis - Foreclosures & Bank Instability.svg”—then the template Vector version available (or Vva) does not need the new image name parameter.
Description
English: Chart showing feedback loops within housing market and with financial market and economy

Summary

This diagram explains two vicious cycles at the heart of the subprime mortgage crisis.

Cycle One: Housing Market

The first cycle is within the housing market. Voluntary or involuntary foreclosures increase the supply of homes, which lowers home prices creating further negative equity. By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak.[1][2] This major and unexpected decline in house prices means that many borrowers have zero or negative equity in their homes, meaning their homes were worth less than their mortgages. As of March 2008, an estimated 8.8 million borrowers — 10.8% of all homeowners — had negative equity in their homes, a number that is believed to have risen to 12 million by November 2008. Borrowers in this situation have an incentive to "walk away" from their mortgages and abandon their homes, even though doing so will damage their credit rating for a number of years. The reason is that unlike what is the case in most other countries, American residential mortgages are non-recourse loans; once the creditor has regained the property purchased with a mortgage in default, he has no further claim against the defaulting borrower's income or assets. As more borrowers stop paying their mortgage payments, foreclosures and the supply of homes for sale increase. This places downward pressure on housing prices, which further lowers homeowners' equity. The decline in mortgage payments also reduces the value of mortgage-backed securities, which erodes the net worth and financial health of banks. This vicious cycle is at the heart of the crisis.[3]

Cycle Two: Financial Market and Feedback into Housing Market

Foreclosures reduce the cash flowing into banks and the value of mortgage-backed securities (MBS) widely held by banks. Banks incur losses and require additional funds (“recapitalization”). If banks are not capitalized sufficiently to lend, economic activity slows and unemployment increases, which further increases foreclosures. As of August 2008, financial firms around the globe have written down their holdings of subprime related securities by US$501 billion. Mortgage defaults and provisions for future defaults caused profits at the 8533 USA depository institutions insured by the FDIC to decline from $35.2 billion in 2006 Q4 billion to $646 million in the same quarter a year later, a decline of 98%. 2007 Q4 saw the worst bank and thrift quarterly performance since 1990. In all of 2007, insured depository institutions earned approximately $100 billion, down 31% from a record profit of $145 billion in 2006. Profits declined from $35.6 billion in 2007 Q1 to $19.3 billion in 2008 Q1, a decline of 46%. Federal Reserve data indicates banks have significantly tightened lending standards throughout the crisis.[4] Unemployment in the U.S. has increased to a 14-year high as of November 2008.[5]

Further Sources and Solutions

Economist Nouriel Roubini described the vicious cycles within and across the housing market and financial markets during interviews with Charlie Rose in September and October 2008.[6] He further describes the crisis in these other video segments.[7][8] He called for an additional $250 billion to help recapitalize the banks, closure of insolvent "zombie" banks, regulatory overhaul, and $300 billion in infrastructure spending during these interviews.

References

See also

The images below contain additional high-level explanation of the crisis further citations. thumb|Factors Contributing to Housing Bubble – Diagram 1 of 2

thumb|Domino Effect As Housing Prices Declined – Diagram 2 of 2
Date
Source Own work (Original text: I created this work entirely by myself.)
Author Farcaster (talk) 17:06, 26 December 2008 (UTC)

Licensing

[edit]
Farcaster at English Wikipedia, the copyright holder of this work, hereby publishes it under the following licenses:
w:en:Creative Commons
attribution share alike
This file is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported, 2.5 Generic, 2.0 Generic and 1.0 Generic license.
You are free:
  • to share – to copy, distribute and transmit the work
  • to remix – to adapt the work
Under the following conditions:
  • attribution – You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use.
  • share alike – If you remix, transform, or build upon the material, you must distribute your contributions under the same or compatible license as the original.
GNU head Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1.2 or any later version published by the Free Software Foundation; with no Invariant Sections, no Front-Cover Texts, and no Back-Cover Texts. A copy of the license is included in the section entitled GNU Free Documentation License.
You may select the license of your choice.

Original upload log

[edit]
The original description page was here. All following user names refer to en.wikipedia.
  • 2008-12-26 17:34 Farcaster 960×720× (16380 bytes)
  • 2008-12-26 17:29 Farcaster 960×720× (16314 bytes)
  • 2008-12-26 17:06 Farcaster 960×720× (16314 bytes) {{Information |Description=Chart showing feedback loops within housing market and with financial market and economy |Source=I created this work entirely by myself. |Date= |Author=~~~~ |other_versions= }}

File history

Click on a date/time to view the file as it appeared at that time.

Date/TimeThumbnailDimensionsUserComment
current00:51, 14 October 2010Thumbnail for version as of 00:51, 14 October 2010960 × 720 (16 KB)Hideokun (talk | contribs){{Information |Description={{en|Chart showing feedback loops within housing market and with financial market and economy<br/> ==Description== This diagram explains two vicious cycles at the heart of the [[:en:subprime mortgage crisis

The following page uses this file:

File usage on other wikis