Shuyi Li

The global financial crisis of 2008， is considered to be the strongest financial crisis after the 1930 Great Depression by many economists. It leads to the bankruptcy of many large financial institutions， depression in real estate markets and increasing unemployment rate all around the world. The causes might include incomplete housing policies， deregulatory legislation， poor supervise and excessive leverage. This essay will focus on one cause of the 2008 financial crisis： incomplete housing policies， and then analysis the relevant regulatory changes： issue Dodd-Frank Art， finally offer recommendation on future resolutions to incomplete mortgage lending policies.

As Peter Wallison points out， USs housing policies are the main reason of the 2008 financial crisis， and other causes as chain reaction only following the government policy. Actually， since 1990s， government regulations begin to decrease traditional mortgage lending standards. For example， two USs large public government sponsored enterprise， Freddie Mac and Fannie Mac， are required to improve their holdings of loans for low-and-middle income borrowers， and issue more loans with little or no down-payment by Housing and Urban Development （Valentin， 2010）. It perhaps boost the US housing market， however， the traditional lending standards were decreased to gain these goals， subsequently long-term easy availability of credit trigger a significant depression of risk controls for the credit extension and the housing asset price bubble in the US housing markets. （Folarin， 2010）

Furthermore， from 2002 to 2004， Fed's prolonged low-interest rate policy contributes to promote the housing demand and housing price， it might aggravate the bubble of housing market. It is absolutely attractive because of lower short-term interest rates and adjustable rate mortgages loans with lower down-payments. Throughout 2002 to 2004， the Fed began to inject additional reserves and maintain short-term interest rates at 2% or less. In 2005， with Fed pushed short-term rate grows， adjustable rate mortgages rates were reset， mortgage payments by monthly increased， the housing prices began to fall， and default rate goes up rapidly. Also， due to rising inflation， the Fed had to push interest rates upward. Consequently， interest rates on adjustable rate mortgages keep increasing and the default rate also began to soar. This depression in risk controls for the extension of credit led to excessive lowering underwriting standards for sub-prime mortgages （Folarin， 2010）.

In order to address the 2008 financial crisis， US government issued the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010. The Dodd-Frank Act is often considered as a significant change of the US financial sector regulation and the most fundamental set of regulatory reforms in the financial area （Saule， 2011）. It illustrates a series of changes to the Credit Rating Agencies market， and made specific rules to the Securities and Exchange Commission （SEC） and other Federal Agencies. In addition， the regulation requires internal risk control and governance reform， and reducing reliance on credit ratings effectively， it is beneficial for eliminate the bubble of housing market. Saule mentions that the Dodd-Frank Act is likely to address some of the most important issues raised by the 2008 financial crisis and to fill many significant gaps in the pre-crisis regulatory framework.

First of all， Dodd-Frank Art sharply improve Credit Rating Agencies liability for issuing untrue ratings by reducing the pleading standards for private actions against Credit Rating Agencies under Rule of the Securities and Exchange Act of 1934. Thus， this new policy could make it easier for the SEC to impose sanctions on Credit Rating Agencies and to bring claims against Credit Rating Agencies for cheating and material misstatements. Second， Consumer Financial Protection Bureau created， to examine and enforce regulations for all businesses engaged in issuing residential mortgage products， as well as for issuers of other financial products marketed to poor people. Similarly， the Federal Reserve Board waited until 2008 financial crisis， to implement the Truth In Lending Act regulations to protect consumers avoiding unfair and deceptive lending in the mortgage market， and make sure that advertisements for mortgage loans are truly， accurate and reliable， and misleading or deceptive representations are forbidden. Thirdly， according to Dodd-Frank Art， Financial Stability Oversight Council was created， which would monitor markets for asset price bubbles and the buildup of systemic risk， develop liquidity requirements， and assist in the orderly liquidation of troubled financial firms.

In terms of future recommendation regarding to housing policies， it could be considered include： adjust the tighter monetary policy and use additional credit restraint by means of an aggressive use of countercyclical macro-prudential tools to avoid the bubble； capital requirements regulation and supervision of financial institutions to ensure that they have enough capital to address a number of systematic and unsystematic risk. For instance， AIGs capital has obviously not high enough. Banks sponsoring SIVs point to need for capital requirements of OBS operations. Increase regulation for high risk operations. Capital requirements need to be countercyclical. Compensation Pay in the financial services industry needs to consider the long-term effect of the compensation scheme. Also， requirements that bonuses be paid out for a number of years after they have been earned and only if the firm has remained in good health are being examined. Such “clawbacks” may encourage employees to reduce the riskiness of their investment activities.

To sum up， it could be considered that USs housing policies are the main reason of the 2008 financial crisis. Decreasing traditional mortgage lending standards led to higher risk controls for the extension of credit and subsequently the creation of an asset price bubble， and Fed's prolonged low-interest rate policy encourage more lowering of underwriting standards for sub-prime mortgages， increase default rate and thus aggravate the bubble of housing market. As a essential regulatory change， issuing the Dodd-Frank Art helps regulators to better control markets for asset price bubbles， and monitor banks and other financial institutions structure themselves to avoid “too big to fail”， and improved supervision in all of these areas will go a long way towards preventing the re-occurrence of financial crises in the future.

Reference：

[1]Valentin D，Darius P，Leo T（2010）Impact of the Dodd-Frank act on credit ratings Journal of Financial Economics，Volume 115，Issue 3，March 2015，Pages 505–520.

[2]RANDALL S.KROSZNER（2010）The Legacy of Deregulation and the Financial Crisis-Linkages Between Deregulation in Labor Markets，Housing Finance Markets，and the Broader Financial Markets，Journal of Financial Services Research，Lessons from Financial Crises：The Role of Clearinghouses，Journal of Financial Services Research，Kluwer Academic Publishers，Manufactured in the Netherlands.

[3]Lgnazio V（2013）Key issues for the success of macro-prudential policies，available from http：//www.economist.com/news/schoolsbrief/21584534.

[4]Folarin A（2015）The global financial crisis：Causes，effects and issues to consider in the reform of financial regulation，In International Banking in the New Era：Post-Crisis Challenges and Opportunities.Published online：08 Mar 2015：167-190.

[5]Saule t.Omarova（2009）The dodd-frank act：a new deal for a new age，Lessons from The Global Financial Crises of 2008，13 N.C.Banking Inst.157.

[6]Ryan K.Brissette（2011）The Dodd-Frank Wall Street Reform and Consumer Protection Act：The Volcker Rule's Unintended Consequences，15 N.C.Banking Inst.231.