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.
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