Savings & Loan Crisis
More than 1000 savings and loan institutions fail at a cost of about $160 billion, much of it paid for by U.S. taxpayers. S&Ls had evolved beyond their original purpose of writing mortgages to engage in riskier consumer and commercial loans. They were victims of deregulation, rising interest rates and mismanagement. As is the case in today’s credit crisis, many experts worried that resolving the S&L crisis with taxpayer funds would encourage lenders to take unwise risks in the future. Others felt it was a necessary response to prevent a broader economic collapse.
The Federal Reserve orchestrates a group of banks to commit $3.6 billion to rescue Long-Term Capital Management, a hedge fund nearing collapse due to bad bets in the bond markets. The Fed’s precedent-setting move was designed to avert wholesale dumping of securities that would depress prices and cause ripple effects through the financial markets. The Fed used a similar approach in 2008 to prevent the collapse of Bear Stearns.
Technology stocks reach their zenith, ending the “dot-com bubble” that began in the mid-1990s. Stock prices tumble in 2000 and 2001, and continue down until hitting bottom in October 2002
Fed starts cutting rates to stimulate the economy. It reduces the Fed funds rate to 1.75% from 6.5% in 11 steps from May 2000 to December 2001.
The U.S. economy enters a mild recession that ends in Novermber.
Annual home-price appreciation rises to 10% a year in California, Florida and the Northeast, compared to a long-term average of 3%-4%. Among the causes are low interest rates, which allow borrowers to take out larger loans to bid up prices.
Fed funds rate falls to lowest point: 1%
Worried that the economy will overheat, causing inflation to rise, Fed raises Fed funds rate to 1.25%, beginning a series of increases that will take it to 5.25% on June 29, 2006.
For the year, more than 30% of new home mortgages carry adjustable interest rates, up from 10% in 2001.
For the year, the rate of home-price again peaks at more than 20% above 2003 levels. Home prices rise 25% for the year in California, Florida and some other markets.
About 22% of new home mortgages are categorized as subprime, up from 8% in 2003.
During the year, home prices level off and begin to fall. Home inventories build up.
June 29: Fed makes final increase in the Fed funds rate, raising it to 5.25%.
April-June: In the second quarter national home prices peak.
July-September: Home foreclosure begin an increase that will take them from less than 200,000 in the third quarter to more than 600,000 in the first quarter of 2008.
During the year, more than 25 subprime lenders announce deep trouble, with many declaring bankruptcy or reporting steep losses.
Home prices begin to fall in the largest U.S. markets, the first decline since 1995.
April 2, 2007
The country’s largest subprime lender, New Century Financial, files for Chapter 11 bankruptcy.
The credit crunch spreads as hedge funds and other financial institutions begin to report losses and write-downs for mortgage-backed securities.
Fed makes $100 billion available to help banks through the liquidity crisis.
American Home Mortgage files for Chapter 11 bankruptcy.
August 17: The Fed reduces the discount rate to 5.75% from 6.25%.
September 18: Fed begins a series of reductions in the Fed funds rate, reducing it from 5.25% to 2% on April 30, 2008.
September 30: Swiss bank UBS announces $690 billion in third-quarter losses.
October 10: Federal government creates the New Hope Alliance to help some homeowners who owe more than their homes are worth.
October 15: The federal government backs a group of banks creating a $100 billion fund to buy mortgaged-backed securities that have fallen in value.
Citigroup reports $6.5 billion 3rd quarter loss.
October 24: Merrill Lynch reports $7.9 billion 3rd quarter loss.
October 30: UBS reports $4.4 billion 3rd quarter loss.
Fed provides $41 billion for banks to borrow at low rates.
HSBC reports $3.4 billion 3rd quarter loss.
In the fourth quarter, mortgage delinquency rates rise to 5.82%, the highest since 1985, while an additional 2.04% of loans are in the foreclosure process, the highest level ever. While subprime loans with adjustable rates make up just 7% of all loans outstanding, they account for 42% of foreclosures started in the quarter. Another 20% of foreclosures involve prime mortgages with adjustable rates.
Fed launches Term Auction Facility to lend money for up to 28 days to institutions such as commercial banks, allowing them to use mortgage-backed securities and other risky.
Citigroup reports $18.1 billion 4th quarter loss.
Merrill Lynch reports $11.5 billion 4th quarter loss.
UBS reports $13.7 billion 4th quarter loss.
Bear Stearns is bought by J.P. Morgan for $2 a share in a deal backed by a Fed guarantee of up to $29 billion in credit.
Nearly 650,000 homeowners entered the foreclosure process in the first quarter, a 23% increase from the fourth quarter of 2007 and more than double the number from the first quarter of 2007.
Fed cuts Fed funds rate to 2% from 2.25 percent. Many experts expect rate cuts to stop here, as inflation is picking up.
On a mostly party line vote, the House passes a Democratic bill to rescue half a million homeowners whose properties are worth less than they owe. President Bush and Republican leaders indicate they may compromise on the bailout, which they had opposed.
U.S. attorney general Michael B. Mukasey says the Justice Department will not create a national task force to investigate allegations of widespread mortgage fraud associated with the subprime crisis. Mukasey said the incidents of fraud were localized and compared them to “white-collar street crimes.”
The Federal Housing Administration says it expects to lose $4.6 billion because of high default rates on home loans.