Power of Mortgage in the Financial Market - Essay Example

The Banks could not offer loans to house buyers because the value of the housing was dropping, while those with loans for mortgages could not repay the loans. At one point, some of the house owners could not sustain the charges and opted for the house to be taken by the bank (Ciro, 68). The value of the mortgage dropped in two years to almost 50%, which represents a tremendous loss for the bank. The drop in sales and demand for mortgages made recovery of loans impossible.

Many house sellers were making losses, while the bank was speculating for a change in demand, which never occurred. The result was a surplus of housing units with low demand affecting the prices of the housing units. The mortgage industry was among the main sectors that contributed to the financial crisis by creating price reductions. With the massive losses incurred by the mortgage industry, the banks couldn't survive because of reliance on the mortgage as collateral. The losses were reflected on the bank balance sheet leading to increased liability. The continuous drop in the value of housing units did influence the uptake of loans. Initially, loans were taken with some areas such as California having bigger loans due to the cost of housing (Tongue, 86). The number of customers willing to buy housing units has been decreasing while house construction companies are constructing new houses. The result of the imbalance is the surplus witnessed in the mortgage industry.

Bank lending was affected. Banks refuse to lend because of the volatility of the market leading to panic in the market. In response to the reduced lending, the prices of mortgages came down significantly leading to increased losses in the banking and mortgage sectors of the economy. The capital and financial markets were affected. The effect lasted despite efforts of the government to provide bailouts. The bailout did not achieve its goal because the liability in the financial sector had surpassed the availed finances. The steady decline in the value of the mortgage was the driving factor for the reluctance in lending resulting in the continued crisis (Savona, Kirton, and Oldani, 34). Every sector was suspicion of the collapse of the other; therefore, lending of money was not undertaken by the banks to any sector including the mortgage industry.