If you’re not familiar with the events leading up to the real estate crash of 2008, you may be wondering when it happened. In this article, we’ll outline the events that led to the crisis, from IndyMac’s demise and bankruptcy to the tightening of loan guidelines by Fannie Mae. Regardless of the causes of the crash, it’s important to have a basic understanding of what took place in the housing market and why it is so slow today.
Subprime mortgage crisis
The subprime mortgage crisis and real estate crash 2008 began in April 2007. Too many people took out too much debt and lenders relaxed lending standards, causing housing prices to skyrocket. This led to a series of bailouts by the federal government and the failure of many companies, including Bear Stearns, an investment bank. Fannie Mae and Freddie Mac, also known as the Federal Home Loan Mortgage Corporation, and Lehman Brothers, two large financial institutions, also failed due to overexposure to subprime mortgages. These failed companies were subsequently bought by the government to provide mortgages to people who could not afford them. Ultimately, the collapse of Bear Stearns and Freddie Mac led to the largest bankruptcy filing in U.S. history.
A major factor contributing to the subprime mortgage crisis was the deregulation of the mortgage industry. The Gramm-Leach-Bliley Act had repealed the Glass-Steagall Act, which prohibited a single financial institution from conducting both investment and commercial banking activities. This change allowed financial institutions to grow significantly and merge with other institutions without raising capital reserve requirements. As a result, the subprime mortgage market collapsed and the stock market went into a slump.
IndyMac’s demise
As the housing crisis worsened, IndyMac’s stock fell sharply. Although the firm’s CEO argued that the company deserved the punishment, rising Alt-A and prime mortgage delinquencies signaled that the housing crisis had spread far and wide. As a result, IndyMac had no way to clean up its books and recoup its losses. In addition, the bank had become heavily involved in risky mortgages, which meant a much higher interest rate.
Since the collapse of IndyMac, several other banks have gone bankrupt. The Federal Deposit Insurance Corporation cannot fully subsidize equity losses of other banks, which are now at risk of failure. Experts estimate that there are 300 banks at risk, which is why regulators have been so quick to seize control of IndyMac. In addition, the government is unlikely to provide adequate financial aid to banks that are failing.
IndyMac’s bankruptcy
If you’re looking for a brief overview of IndyMac’s history, it is important to note that the bank filed for bankruptcy on July 7, 2008, a few months after the Great Recession. The company was the seventh largest savings and loan in the country. The FDIC insured most of the money held in IndyMac’s accounts. Customers rushed to withdraw their money, speeding up the process. The FDIC took over the failing bank, and found many of the loans made by IndyMac were questionable.
IndyMac’s bankruptcy timeline reveals that the bank was shut down and will now be run by the federal government. In addition, the bank was left with about $1 billion in uninsured deposits. As of last month, depositors were expected to meet with FDIC claims agents, who said they would be paid 50% of the uninsured money. The FDIC estimates that the total IndyMac payout will be between $4 billion and $8 billion.
Fannie Mae’s tightening of loan guidelines
As the housing market recovers from the real estate meltdown, Fannie Mae has loosened lending guidelines. The lender plans to increase its forward commitments of multifamily loans and improve its marketing of these loans. The forward commitment program is a way for developers to pay off their construction loans once they have completed a project. Other initiatives include the Affordable Multifamily Recovery Funds and Low Income Housing Tax Credit. Both provide credits for private investors and grant money to states to help increase the supply of affordable housing.
Under the new guidelines, Fannie Mae will no longer back mortgages for condos and co-ops that do not have a proper maintenance plan. The new rules also require lenders to scrutinize co-op and condo assessments to ensure they are not endangering the stability of a building. Individual homebuyers will be affected by the new regulations, which go into effect on Jan. 1, 2022.
Preparing for a real estate crash
If you are thinking about investing in real estate, it might be time to prepare for a crash. The housing market goes through cycles. If it continues to rise, prices will fall, and if the economy is weak, prices will drop even further. When this happens, it can cause massive damage to property values. But it does not have to be this way. By preparing now, you will be better prepared for the inevitable crash.
First and foremost, you need to have sufficient cash reserves. You should also invest in other liquid funds. Avoid using all your cash in unnecessary purchases, and avoid becoming over-leveraged. You need to have the liquidity to access your cash when needed, and to be able to buy more investment property. When prices go down, you can make more money and continue investing in real estate. By building up your cash reserves, you can buy more real estate with fewer losses.
