After ten years of expansion in the United States housing market activities, the moment of reckoning came in 2006 when the market reached its peak. This period was named the Great Moderation. It was the period when the home prices in started moving decisively downward. This would have far-reaching consequences in the financial sector, both at home and abroad.
By December 2007, the US economy was entering a recession. A number of financial firms were already experiencing huge financial distress as more and more financial markets felt the turbulence. The Federal Reserve had to step in to provide liquidity and support programs to steady the ship and limit the damage to the economy.
Effects of the Great Recession on the credit sector
Almost a decade after the Great Recession, credit reporting continues to be a major factor in the financial life of the average consumer. The significance of credit reports has spread from credit cards, auto loans and mortgages to other areas like insurance, rental housing and employment.
Now consumer can be denied a job or a rental apartment because of a negative mortgage-related event. The same consumer will have to contend with higher insurance premiums. It is amazing how a foreclosure can strangle a consumer economically and lead to a period of uncertainty.
The use of credit reporting as a judge of character
While a poor credit score is normally the result of many circumstances that are beyond a person’s control, it has come to be associated with negative stereotypes. A bad credit score can cause a consumer to be labeled irresponsible, deadbeat, dishonest or lazy. The truth is that it can be the result of circumstances such as loss of employment, divorce, illness or nationwide economic collapse.
Interesting Read: How Lexington Law Firm Repaired My Credit (2017 Review)
Enhanced prudential standards for financial institutions
The Federal Reserve now requires financial institutions to demonstrate higher standards of prudency. These include disclosure requirements, debt limits and capital requirements. Standards are much more stringent than those imposed on other institutions that don’t present a big risk on US financial stability. The Federal Reserve has the powers to require an institution to have contingent capital.
The Federal Reserve conducts yearly stress tests for companies that are symmetrically important. The results of the tests are then used to adjust those companies’ living will. The results of these stress tests are also published by the Federal Reserve.
Credit rating companies role in the 2008 recession and the Dodd-Frank Act
Credit ratings companies were roundly criticized for their role in the financial crisis, and for good reasons. They were blamed for exaggerating ratings of high risk mortgage-backed securities. The net result was the financial system taking on a greater risk that it could not safely handle.
While the Dodd-Frank Act attempted to fix the credit ratings institutions, it is difficult to say whether it has had the desired impact. The entire credit ratings market continues to be dominated by three companies. The private sector also depends on these institutions for its investment options.
The 2008 recession was a watershed moment for the entire credit sector and its impact will continue to be felt for years to come. It is accurate to say that it will also continue to be a reference point for credit law reform for the foreseeable future.