Bank Management

Global Financial Crisis of 2007–2009

 Beginning in mid-2007, the U.S. and global economies began to weaken

following a series of crises related to problem mortgages and other loans and
the resulting difficulties this situation created for financial institutions that
played a role in these markets
 In order to help more borrowers qualify for mortgages, and motivated by the
search for greater fee income, many lenders designed home loans that did not
require borrowers to make sufficiently large monthly principal and interest
payments.
 Hom e mortgage loans were purposely designed for, and made to, individuals
whose income was insufficient for making the minimum payments that would
eventually pay off the loan
 The expectation was that either incomes would increase over time or the
property value would rise sufficiently to cover future payments
 In addition, many lenders originated mortgages with the intent to sell them
soon after loan closings (the process was labeled the originate-to-distribute
(OTD) approach), such that the loan originator did not retain the credit risk
 If the loan went bad, the buyer of the mortgage would bear the loss and not the
mortgage originator
 As home prices started to decline, many institutions involved in housing
finance began to realize losses from home mortgage defaults.
 Initially, several small mortgage banks failed.
 Following these failures, national mortgage lenders, such as Countrywide and
Washington Mutual, began to experience large waves of borrowers defaulting
on their loans
 Many of these borrowers were high risk because their incomes did not cover
the payment amount that would have repaid the obligated principal and interest