Diary of a Mortgage Meltdown

These events occurred in the 14-month span leading up to the collapse of the subprime mortgage market. Here is what was said and what was done.

Source: U.S. Congress Joint Economic Committee

March 2007

The Federal Reserve announces draft regulations to tighten lending standards. Lenders would be required to grant loans on a borrower's ability to pay the interest rate that would apply after an initial low fixed-rate period of two or three years.

New Century Financial, the second largest subprime lender in 2006, stops making loans. It had loans of $51.6 billion in 2006, which was about 8.1 percent of the subprime market.

Federal Reserve Chairman Ben Bernanke tells Congress that the housing market weakness "does not appear to have spilled over to a significant extent."

April 2007

New Century Financial files for bankruptcy under Chapter 11 after saying that it can no longer sell mortgage loans to Fannie Mae or act as the primary servicer for its mortgage loans.

Freddie Mac announces plans to refinance up to $20 billion of loans held by subprime borrowers who would be unable to afford their adjustable-rate mortgages at the reset rate.

Sales of existing homes fell 8.4 percent in March from February, the sharpest month-to-month drop in 18 years, according to the National Association of Realtors.

June 2007

Housing and Urban Development Secretary Alfonso Jackson tells the National Press Club that counseling and financial education are the best ways to tackle the subprime foreclosure boom.

U.S. foreclosure filings surged 90 percent in May from May 2006, RealtyTrac says. Foreclosure filings were up 19 percent from April.

Bear Stearns pledges up to $3.2 billion to bail out one of its hedge funds, blaming the outlook for the subprime mortgage market.

July 2007

Bear Stearns announces its two hedge funds that invested heavily in the subprime market are essentially worthless, having lost over 90% of their value, equal to more than $1.4 billion.

Fed Chairman Ben Bernanke told Congress that there will be "significant losses" due to subprime mortgages, but added that the subprime problems have not spilled over into the greater system. The problems, he said, "'likely will get worse before they get better."

The 18th consecutive decline in home prices, beginning in December 2005, is reported by S&P/Case-Shiller's Home Prices Indices, which tracks housing prices in metropolitan areas and is considered a leading measure of U.S. single-family home prices.

August 2007

Two hedge funds managed by Bear Stearns declare bankruptcy. Both were invested heavily in subprime mortgages. Fund investors file suit against Bear Stearns, alleging the investment bank mislead them about the extent of the funds' exposure.

Statement by Treasury Secretary Hank Paulson: "Borrowers weren't quite as disciplined as they should be. ... Lenders clearly weren't as disciplined as they should be. We've seen some excesses. We've seen it in the subprime area, and that will be with us for a while."

American International Group, a large U.S. mortgage lender, warns that mortgage defaults are spreading beyond the subprime sector.

For two days, beginning August 9, European Central Bank and the Federal Reserve intervene in markets by pumping billions of dollars of liquidity into the markets.

All three major stock indexes -- Dow Jones, NASDAQ and S&P 500 -- are 10 percent lower than their July peaks. Analysts say this signals a correction of the stock market, due to tightening in the credit markets.

Countrywide Financial, the nation's largest mortgage lender, draws down $11.5 billion from its credit lines.

The Federal Reserve cuts the discount rate by half a point. Stocks rally.

RealtyTrac Inc announces foreclosures were up 93% in July 2007 from July 2006.

Federal Reserve Chairman Ben Bernanke says the Fed will "act as needed" to contain the spreading mortgage crisis and discourage predatory lending practices.

President Bush says the "government has a role to play" in the growing crisis and calls upon the Federal Housing Administration to help subprime borrowers refinance into loans insured by the federal agency.

September 2007

The Federal Reserve and other banking regulators call on mortgage companies to work with struggling homeowners likely to lose their homes as their adjustable-rate mortgage interest rates escalate.

The House Committee on Financial Services holds a hearing to examine the troubled credit and mortgage markets and potential "implications for U.S. Consumers and the Global Economy."

A National Association of Realtors report shows a 16.1 percent decline in July from a year ago on pending sales on existing homes and a 12.2 percent decline from June. The July 89.9 level is the second lowest in the history of the index and its lowest since the September 11th terrorist attacks that severely disrupted the national economy.

The Mortgage Bankers Association's quarterly report shows the mortgage loan delinquency rate was 5.12 percent of all loans outstanding in the second quarter of 2007, up 28 basis points from the first quarter of 2007, and up 73 basis points from a year ago. The subprime delinquency rate was up from 13.77 in the first quarter to 14.82 percent in the second quarter.

The U.S. Department of Labor's Bureau of Labor Statistics says employers cut 4,000 jobs from payrolls last month, the first net decrease since 2003. Twenty-two thousand construction jobs were lost in August, with most related to the housing downturn. Nearly 100,000 construction jobs have been lost since September 2006.

Treasury Secretary Henry Paulson urges large financial firms to work with the administration to help ensure that subprime homeowners get assistance in dealing with sharply rising mortgage payments as their initial low adjustable-rate mortgages reset to higher levels.

The U.S. House of Representatives passes H.R. 1852, the "Expanding American Homeownership Act of 2007," which would authorize lower down payments for borrowers who can afford mortgage payments, expand funding for housing counseling and direct the Federal Housing Administration to offer mortgage loans to higher risk - but qualified - borrowers.

The Federal Reserve cuts the target federal funds rate by a half point to 4.75 percent. It is the first rate reduction in four years and the steepest in nearly five years.

Home foreclosure filings surged to 243,000 in August, according to RealtyTrac. That's an increase of 115 percent from August 2006 -- and 36 percent from July -- marking the highest number of foreclosure filings since RealtyTrac began tracking monthly filings. The foreclosure filing rate nationally is now one in every 510 homes.

The Commerce Department reports that construction of new homes fell by 2.6 percent in August to the slowest pace in 12 years.

The Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of Fannie Mae and Freddie Mac, agrees to relax restrictions on the mortgage finance companies' investment holdings, enabling Fannie Mae and Freddie Mac to buy $20 billion more in subprime mortgages.

Testifying before the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke says that the credit crisis has created "significant market stress" and that the Fed is "committed to preventing problems from recurring, while still preserving responsible subprime lending."

The National Association of Realtors releases new housing statistics that reveal sales of existing single-family homes dropped by 4.3 percent in August, compared to July. It is the sixth straight decrease, pushing sales to the lowest point in five years.

The Commerce Department says sales of single-family homes decreased by 8.3% last month, the lowest level in seven years. The median price of a new home declined by 7.5% to $225,000 in August 2007 as compared to the same month a year ago.

October 2007

UBS reports its first quarterly loss in nine years. The largest wealth manager in the world plans to write down $3.4 billion in its fixed-income portfolio and other departments, and cut 1,500 jobs in its investment bank.

The housing crisis is far from over, according to former Federal Reserve Chairman Alan Greenspan. "As in similar situations of inventory excess, I would expect home prices declines to continue until the rate of inventory liquidation reaches its peak." He says the consumer and broader economy will suffer as a result.

Credit-rating agency Moody's Investors Service says subprime mortgage bonds originated in the first half of 2007 include loans that are going delinquent at the fastest recorded rate.

The U.S. Securities and Exchange Commission (SEC) says it will review potential conflicts of interest in the credit rating agencies, citing questionable practices associated with the ratings given to mortgage-backed securities that have contributed to the spreading housing crisis.

The Bush administration announces a new mortgage industry coalition to help homeowners stay in their homes. Treasury Secretary Henry M. Paulson Jr. estimates that Hope Now, will assist 2 million homeowners whose initial mortgage rates are resetting to often unaffordable rates. The coalition includes 11 of the largest mortgage service companies, which represent 60 percent of all U.S. mortgages, as well as mortgage counseling agencies, investors and large trade organizations.

The National Association for Realtors lowers its prediction for existing home sales for the year from 5.92 million to 5.78 million. Although demand for applications to purchase homes and refinance existing mortgages rose during the preceding week, consumers continue to have trouble getting loans approved. New home sales are projected to fall to 805,000 this year and to 752,000 next year.

Federal Reserve Chairman Ben Bernanke says that the housing crisis will create a "significant drag" on domestic economic growth into next year.

Citigroup reports a 57 percent drop in its third-quarter profit. Citigroup was forced to write off $3.55 billion and set aside $2.24 billion to cover anticipated losses stemming from failing mortgages and consumer loans.

Citigroup, JPMorgan Chase, and Bank of America announce the creation of a Master Liquidity Enhancement Conduit, to raise $200 billion in order to purchase securities that are otherwise likely to be dumped on the market and further depress the housing debt crisis.

The National Association of Home Builders reports that its housing market index, which tracks builders' perceptions of conditions and expectations for home sales over the next six months, dropped to 18, its lowest level since the inception of the index in 1985.

The Commerce Department says U.S. home construction starts fell 10.2 percent last month to their lowest level in more than 14 years.

The Labor Department reports a surge in lay-offs with unemployment-benefit claims far surpassing expectations. Applications increased 28,000 from the previous week.

Standard & Poor's cuts the credit ratings on $23.35 billion of securities backed by pools of home loans that were offered to borrowers during the first half of the year. The downgrades even hit securities rated AAA, which is the highest of the 10 investment-grade ratings and the rating of government debt.

Merrill Lynch writes down $7.9 billion due to exposure to collateralized debt obligations, complex debt instruments, and subprime mortgages. As a result, the firm takes a $2.3 billion loss, the largest in the firm's history.

John Robbins, former chairman of the Mortgage Bankers Association, says he expects that 1 million borrowers will lose favor with their lenders each year and that 500,000 of them will not be able to save their home loans.

Shareholders sue Merrill Lynch & Co for issuing false and misleading statements regarding its exposure to risk mortgage investments. The lawsuit seeks class-action status on behalf of purchasers of Merrill stock between February 26 and October 23, 2007.

Addressing Women in Housing and Finance, Treasury Assistant Secretary David Nason outlines the Bush Administration's foreclosure avoidance plan. The plan includes FHA modernization, changes in the Federal Tax Code related to mortgage debt cancellation, and the Hope Now Alliance charged with coordinating efforts to reach more homeowners and find long-term solutions.

The Federal Reserve Board lowers the federal funds rate to 4.50 percent, dropping the rate by one-quarter percentage point.

November 2007

On top of the $5.9 billion write-down reported in early October, Citigroup says it will take an additional $8 billion to $11 billion write-down related to subprime mortgages.

According to RealtyTrac, foreclosure filings rose in 77 of the largest 100 metropolitan areas quarter. Residential foreclosure filings nearly doubled in the third quarter from a year earlier.

Barclays Group PLC takes a $2.7 billion write-down for losses on securities linked to the U. S. subprime mortgage market collapse.

The National Association of Realtors says sales of existing single-family homes and condominiums dropped by 1.2 percent in October to a seasonally adjusted annual rate of 4.97 million units. The median price of a home sold in October declined to $207,800, a drop of 5.1 percent from October 2006. It is the single largest one-year decline on record.

December 2007

Swiss bank UBS announced it would write down an additional $10 Billion in subprime losses.

Washington Mutual announced that it expected its fourth quarter loan losses would reach $1.6 billion.

The Federal Reserve Board announced a 25 basis-point cut in the discount rate to 4.75 percent.

Morgan Stanley announced it would be writing down an additional $9.4 billion in losses on subprimelinked investments.

January 2008

Bank of America, the nation's second largest banking institution, announced that it would buy Countrywide Financial, the nation's largest mortgage lender. This acquisition ended days of speculation that Countrywide would be forced to declare bankruptcy because of its role in the proliferation of subprime mortgages.

Merrill Lynch, the nation's third largest securities firm, announced it would need to write down more than double its initial projection related to subprime mortgage losses. Initial projections showed Merrill Lynch would lose around $7 billion; however, it now appears that number could reach $15 billion.

Citigroup the largest bank in the U.S. announces that its mortgage portfolio dropped in value by $18.1 billion. This news led Citigroup to its first quarterly loss in 16 years.

Lehman Brothers said it would no longer continue the practice of wholesale mortgage lending.

New home sales dropped 26.4 percent in 2007, according to a Commerce Department report. In addition, the median price of new homes fell by 10.4 percent from December 2006 - the biggest 12 month decline in 37 years.

The number of houses in foreclosure rose 79 percent in 2007, according to Reality Trac. December also marked the fifth straight month where 200,000 or more foreclosure filings were made.

UBS, the world's largest wealth manager, announced the need to write down another $4 in subprime-related losses. This new write-down brings the total for UBS subprime losses over $18.4 billion. Subprime related losses pushed the company its worst year of performance in its institutional history.

Standard and Poor's announced it would be cutting the credit ratings of $534 billion in subprime mortgage backed securities.

February 2008

The $146 billion economic stimulus package is signed into $300-$1200 tax rebate checks to arrive in the second half of 2008.

Credit Suisse, the second largest Swiss bank announced it would write down $1 billion in subprime losses. Up to this point, Credit Suisse had been one of the few major international financial institutions who hadn't been affected by the subprime collapse.

In January, the median home price fell and, for the sixth straight month, existing home sales dropped, according to the National Association of Realtors. The 0.4% drop in sales along with the 4.6% drop in price have been spurred by lenders making it more difficult for families to take out mortgages, making it more costly to receive a loan.

March 2008

The Mortgage Bankers Association released a report showing that by the end of 2007, 2.04 percent of all mortgages were in the foreclosure process. This marks the highest level of foreclosure ever recorded in the Mortgages Bankers Association's report.

Federal regulators act to allow Fannie Mae and Freddy Mac to buy more mortgages.

April 2008

The Commerce Department reports that new single-family home sales fell by an unexpectedly steep 8.5 percent in March and the median sales prices versus a year ago dropped by the largest amount since 1970.

May 2008

The Federal Reserve cut its key rate by one-quarter percentage point to 2 percent, the lowest point in nearly four years.

The American Banking Institute says bankruptcy filings by U.S. consumers jumped 47.7 percent in April from one year ago.

Federal Reserve Chairman Ben Bernanke warns that the increase of late mortgage payments and home foreclosures poses economic dangers and he urges Congress to take additional action.

June 2008

Home foreclosures and late payments set records over the first three months of the year, according to the Mortgage Bankers Association.

July 2008

One in 501 U.S. households entered a stage of the foreclosure process in June, and bank seizures rose 171 percent, according to RealtyTrac Inc.

August 2008

Foreclosures filings in July showed an 8 percent increase from the previous month and a 55 percent increase from July 2007, according to RealtyTrac.

September 2008

The U.S. government took control of mortgage giants Fannie Mae and Freddie Mac, which are tied to roughly half of the nation's $12 trillion mortgage market. U.S. Treasury Secretary Henry Paulson says the two companies would be put into conservatorship.

Lehman Brothers, besieged by the credit crisis and falling real estate values, files for Chapter 11 bankruptcy protection. Merrill Lynch, laid low by the crisis that was triggered by rising mortgage defaults and plunging home values, agrees to be acquired by Bank of America for $50 billion in stock.

The Federal Reserve rescues American International Group Inc., an insurance giant, from bankruptcy by granting an emergency $85 billion loan.

U.S. Treasury Secretary Henry Paulson outlined a strategy to confront the financial crisis, including a program that could cost taxpayers "hundreds of billions" of dollars to buy up bad mortgages. President George W. Bush authorized Treasury to tap up to $50 billion from a Depression-era fund to insure the holdings of eligible money market mutual funds.

Source: U.S. Congress Joint Economic Committee