How Lehman’s collapse 15 years ago changed the U.S. mortgage industry

The collapse of financial heavyweight, Lehman Brothers, fifteen years ago significantly changed the U.S. mortgage industry.

Key event details: Lehman Brothers filed for bankruptcy on Sept. 15, 2008, with $613 billion in debt due largely to an accumulation of risky mortgages that ended up sending shockwaves through Wall Street.
* This resulted in major economic impacts including massive job losses and a deepening recession.

Impact on Mortgage industry: Since the collapse of Lehman Brothers, safeguards have been put in place to create a safer environment for homebuyers when securing mortgages.
* According to Susan Wachter, a professor of real estate and finance, lenders have been now tend to offer safer loan options.
* However, there are concerns that the financial guardrails put in place could be threatened in the future.

Legislative response: In the wake of the economic collapse, comprehensive reforms were put in place to prevent a similar crisis from occurring again.
* One of these measures was the Dodd-Frank Wall Street Reform and Consumer Protection Act which led to the creation of the Consumer Financial Protection Bureau (CFPB).
* This agency introduced new standards for mortgages which banned interest-only loans, “balloon” payments and excessive fees, while also requiring lenders to verify a borrower’s income, assets and debts.

Current situation and future outlook: Although the safeguards put in place post- Lehman’s collapse have led to increased borrower protections, there’s uncertainty looming over the housing market.
* Constitutionality challenges over the funding of the CFPB could threaten its existence and the regulations it has put in place.
* Rising mortgage interest rates have led borrowers to seek out different types of home loans, reviving concerns over risky lending.
* There are also concerns regarding the potential privatization of Fannie Mae and Freddie Mac, which currently operate under federal oversight dealing mostly with less risky loans.

View original article on NPR

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