...Introduction The subprime mortgage crisis is a series of events and conditions that lead to the 2008 global financial crisis, which has caused the worst recession since Great Depression. The subprime crisis has made the five biggest investment banks become history and reduced thousands of American citizens begging on the street corners without a place to lay their heads. There is a proverb in China, “One can cope with the future by viewing the history”. Therefore, by reviewing the main causes of the subprime mortgage crisis and the impact it had on the global economy, we can figure out ways of avoiding a future crisis. * Background * Roots of the subprime crisis * Housing bubble * Homeowner wild speculation * Rapacious financial institutions * High-risk mortgage loans * Securitization practices * Governmental policies * Impacts * The U.S market impacts * The global market impacts * Ways of avoiding a future crisis A. Review the signs of the subprime mortage crisis 1. Rapaid appreciation in housing price 2. Monotonic degradation of loan quality B. Improve the supervision of the government 1. Improve regulation of the financial institutions 2. Policies to promote affordable housing 3. Community reinvestment act * Conclusion Subprime Mortgage Crisis I. Introduction The subprime mortgage crisis is a series of events and conditions that lead to the 2008 global financial crisis, which has caused...
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...The Subprime Mortgage Crisis and What to Do about It A Review of the Literature The fuse for the subprime financial shock was set early in this decade, following the tech-stock bust, September 11th, and the invasions of Afghanistan and Iraq. The subprime mortgage crisis is a historic turning point in our economy and our culture. The disruption in our credit markets is already of historic proportions and will have important economic impacts. More importantly, this crisis has set in motion fundamental societal changes – changes that affect our consumer habits, our values, our confidence to the future, and our psychological status. After this financial crisis, our economic went downturns and worsen now. When we talk about or hear about the subprime mortgage crisis, to fully understand the crisis help us to avoid the crisis happening again in the future. This literature review considers different opinions of the subprime mortgage crisis by responding to the following questions: 1. What are subprime mortgages? 2. How did the subprime mortgage crisis happen? 3. What are the causes of the subprime mortgage crisis? 4. Was the subprime mortgage crisis in the U.S. totally unexpected? 5. What to do to avoid it happening again in the future? By answering these questions, we can have understandings of the subprime mortgage crisis and find out the solutions to the crisis. When Americans taking advantage of the easy credit conditions, we take for granted the problems behind the credit...
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...2000s, mortgage interest rates were low, which allow you to borrow more money with a lower monthly payment. In addition, home prices increased dramatically, so buying a home seemed like a sure bet. Lenders understood that homes make good collateral, so they were willing to participate. In 2007, the US economy entered a mortgage crisis that caused panic and financial turmoil around the world. The mortgage crisis was a result of too much borrowing and flawed financial modeling, largely based on the assumption that home prices only go up. Greed and fraud also played important parts. Banks offered easy access to money before the mortgage crisis emerged. Borrowers got into high risk mortgages such as option-ARMs, and they qualified for mortgages with little or no documentation. Even people with bad credit could qualify as subprime borrowers. Fraud on the part of homebuyers and mortgage brokers helped make the mortgage crisis more serious. Mortgage applications were not checked for accuracy as well as they should have been. This is what started the subprime mortgage crisis, popularly known as the “mortgage mess” or “mortgage meltdown,” came to the public’s attention when a steep rise in home foreclosures in 2006 spiraled seemingly out of control in 2007, triggering a national financial crisis that went global within the year. Consumer spending is down, the housing market has plummeted, foreclosure numbers continue to rise and the stock market has been shaken. The subprime crisis and...
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...Causes of Economic Crisis of 2008 and its resulting Recession Student’s Name Institution Introduction The economic crisis of 2008 which began in the United States had great impact in the global economy. The economic crisis began slowly and grew into global economic crisis. It has affected the stock markets to the extent of stopping operations. In the US it is an issue which has been used as a campaign tool for presidential candidates to request for votes during their campaigns. Due to the crisis many US citizens have felt its impact and even lost their jobs. The crisis began with the United States housing market and gradually resulted into liquidity crisis (Steil, 2009). It is in this regard that this paper looks into the causes of the economic crisis of 2008 and its resulting recession. Causes of the 2008 crisis and its resulting recession Actually, the United States experienced many serious problems that included frozen money markets, plummeting dollar, banks on the threshold of bankruptcy, declining stock market, high levels of public debt and the impending threat of recession. According to some economists, the economic crisis was mainly affected by the world imbalances, perceptions of interest rates, risks and the regulations of the financial system. The following are the main causes of the economic crisis of 2008: Housing Crash The United States housing market is one of the main determinants...
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...Moataz Zakaria 2011/0999 The Subprime Mortgage Crisis Developed countries are not only playing a vital role but also affecting the entire world economy with respect to all its aspects. Since the United States is one of the largest countries all over the world economy wise, its economy has a huge impact on the whole world. The United States government has been facing several of severe financial crises since the World War II in 1945. The subprime mortgage crisis is considered as the most fundamental crisis that faced the American government as well as the whole world in the last ten years. Going back through history, from 2000-2005 there were very low interest rates. On the other hand, property prices were on a rising trend and reached its peak in 2006. Therefore, the subprime borrowers were able to meet their obligations by selling the properties or even getting the properties refinanced; and that caused what so called “The Housing Bubble”. After that, there was a huge fall in housing prices. As a result, the interest rates on subprime loans started to rise; and that caused the subprime borrowers to not be able to cover their liabilities leading to a disaster in the US subprime industry. This meltdown caused more subprime borrowers to fail in paying their debts, and securities held by mortgages lost its value worldwide. Also global investors extremely reduced purchases of mortgage-backed debt and other securities. The crisis started in 2008 when the expansion of...
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...The 2008 Subprime Mortgage Crash and response by the Federal Government Philip J. Scanlon University of Redlands Conditions leading the Subprime Mortgage Crash Many factors contributed to the subprime mortgage crisis, a disruptive economic downturn that its severity can be compared to the Great Depression. Only federal intervention prevented a possible collapse of the world economic system. Ironically, it can be said that federal intervention in the mortgage industry led to the 2008 collapse. By backing risky mortgages, the government created a new systemic financial contagion that began in the housing market, moved through financial and investment markets, and created a loss of confidence in the financial system on which our economy is based. The following conditions created the crisis: 1. For the government, home ownership kept neighborhoods safe and clean because neighbors, in protecting their property, also protected neighborhoods. Government backed loans were offered to otherwise at risk lenders home ownership to strengthen communities, especially low income communities. 2. The government encouraged lenders to extend riskier loans to those more economically disadvantaged and therefore less likely to honor debt obligations. By guaranteeing the loans, the government allayed concerned bankers and other lenders. Fannie Mae and Freddie Mac, backed by the federal government, allowed financial institutes to sell mortgages as secure investments, creating a new financial...
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...were the cause of the financial crisis of 2008 and 2009” The 2008 financial crisis led to a sharp increase in mortgage foreclosures primarily subprime leading to a collapse in several mortgage lenders. Recurrent foreclosures and the harms of subprime mortgages were caused by loose lending practices, housing bubble, low interest rates and extreme risk taking. Additionally, expert analysis on the 2008 financial crisis asserts that the cause was also due to erroneous monetary policy moves and poor housing policies. The federal government encouraged the expansion of risky mortgages to under-qualified borrowers. Congress pushed for the support of affordable housing through extended procurement of non-prime loans for applicants with low income (Zandi, 2008). The cutting down of interest rates to low levels to supplement for technology bubble of early twentieth century and the effects of Sept 11, a housing bubble was created. This move facilitated individuals with poor credit to obtain mortgages in high percentage when lenders created non-conventional mortgages by offering mortgages with extensive amortization periods, loans with interest and payment alternatives such as ARMs. Ultimately, interest rates rose again and many subprime borrowers stopped paying for their mortgages when their interest rate were reset to higher monthly payments. Subprime mortgage is simply defined as loan offered to someone with a weak credit history. Since the 2008 financial crisis had its source in the...
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...| Economics Capstone | 02/12/2012 | Since the U.S. banking crisis of 2007, more than 280 banks in the United States have failed and presently continue to do so. With the closures of these banks, jobs were lost; and the economy has suffered greatly. The banking crisis of 2007 has been considered the largest since the Great Depression. Many researchers, policymakers, economists, and other individuals blame the subprime mortgage market and its collapse for triggering the U.S crisis; many also wonder how such a relatively small market as subprime could cause so much trouble around in the U.S, especially financial institutions that did not get involved with subprime lending or with investment in subprime securities. This paper analyzes financial and economic circumstances associated with the United States financial turmoil that has led to the banking crisis. Section 1 analyzes the collapse of the subprime mortgage market in the United States and outlines factors associated with it. Section 2 outlines the economic factors that led to the banking crisis in 2007. Section 3 summarizes suggestions of research about how to remedy the current crisis and possibly avoid crises in the future. Section 4 will discuss the conclusion of the research. The first signs of the subprime mortgage market collapse in the United States were very high and unusual even for subprime market delinquency and foreclosure rates for mortgages originated in 2006 and 2007. Reinhart and Rogoff (2008b). High rates...
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...SUBPRIME MORTGAGE CRISIS The beginning of 2000s, commodity, especially “petrol” and agricultural products prices was soared unexpectedly. Economic growth of high population countries such as India and China raised demand of agricultural and merchandise products and thus, this demand caused increasing of these products prices. In 2008, not only food prices but also gold and petrol prices reached the highest level in history. On the other hand, while these prices was increasing, the value of the United States Dollar fell than almost all currency units. It was paralelled that the market of real estate particularly “housing prices” decreased a great value in the US in 2006. Hovewer, housing prices started to increase gradually early 2000s in the US because of mortgage. Due to the this increment, banks provided credits to their low income family in order to purchase a new house, but when housing prices fell into decline suddenly, a new credit market which is called subprime mortgage collapsed. In 2006, home mortgage foreclosures were at record highs. From 2006 to 2007 foreclosures fillings grew 75 percent and leaving more than 1 percent of all households in some stage of foreclosure. Foreclosures in the subprime mortgage market were leading the way. In the end of 2006, about 300,000 foreclosure proceedings were initiated, with subprime mortgages accounting for more than half. Majority of these subprime borrowers were low and moderate...
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...Abstract The United States is going through one of the most serious financial crisis’ since the 1930’s. As a result, many people are losing their jobs and some companies are filing for bankruptcy. There are many causes that may have led to this financial crisis. Some include Bush’s investment in the Iraq war, subprime lending awards mortgages to people with poor credit, defaults on loans force banks to raise equity, but most importantly, greed. Not only is there a crisis going on in the United States, but there is a crisis occurring globally also. Bush and his investment in the Iraq war could be a cause to this financial crisis. Prices of everything have gone up and people have to spend more money on items so this causes them to be unable to pay off debts of loans to the banks. When that occurs, banks take a low blow because they miss out on the money. So many people are losing their houses due to lack of income banks. They have to pay the remaining money to the town/government. So after paying the houses of so many people, the banks go bankrupt. If banks go bankrupt, there wouldn’t be anyone to lend money to businesses. There wouldn’t be any jobs if there aren't any businesses. This all leads to no income. The war in Iraq increased oil prices, which increased service prices because everything needs to be delivered in cars or trucks so people have to pay more for goods. But they aren't getting paid more money so they end up losing money. This graph is showing the real...
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...MBA 613, Investment Analysis case study, Subprime Meltdown: American Housing & Global Financial Turmoil Dr. Farooq Malik Noor Main Problems: 1. Financial crisis 2. Before 1990’s many households went into default. 3. In early 2008, the most immediate problem was a wave of foreclosures 4. In 1996 accelerated in average house prices across the United States had risen fairly to reach about 12 percent per annum in late 2005. After this, there was anxiety about inflation and interest rates were increased steadily, with the Federal Funds rate reaching 5.25% in September 2006. 5. Failure of about half of the 32,234 Savings and Loan Associations “S&L’s” that existed in 1986. 6. In 2006, credit risk. 7. Losses of billions 8. subprime crisis Main Cause of the problems: 1. Failure of the financial system in planning and managing the system 2. During the Great Depression, refinancing became difficult. Lenders mostly offered short-term mortgages that needed to be refinanced because they had “balloon” payments at the end. 3. US system for financing home purchases had gone wrong, what had appeared to be a glorious housing boom. 4. Rise in prices was due in part to the Federal Reserve’s policy of maintaining low interest rates after the 2001 recession. Fearing a recession that did not materialize made the Fed keeps interest rates low to be set to only 1 percent from July 2003 to July 2004. In spite of signs of growth in output and prices. ...
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...Causes of financial Crisis 2007-2008 3 i- Role of mortgage lenders 4 ii- Role of mortgage Borrowers 5 iii- Role of investment bankers 5 iv- Role of Credit rating agencies 7 v- Role of CDO Investors and hedge funds 8 C- Impact of crisis on financial institutions and Lehman Brothers 8 D- Measures to mitigate financial crisis 11 E- Conclusion 15 F- References 17 A- Introduction The subprime mortgage crisis happened in the U.S. financial system into the most horrible recession from the time when the Great Depression. This report tracks how the subprime mortgage crisis outspread, disturbing first the housing sector and then the economy on the whole. When banks started lending to subprime borrowers, it looked immense. Unexpectedly, anyone could get a house through a mortgage loan, even with modest or no money down payment. Nevertheless not the entire of those mortgage borrowers were high-quality nominees for the mortgage loan. The defaults of these subprime mortgage borrowers helped lash out the subprime crisis. (Rudd, 2009). The circumstances of the mortgage markets became more deteriorated due to the involvement of Investment Banks in underwriting the mortgage loans. The amplified exploitation of the secondary mortgage markets by lenders further to the numeral of subprime mortgages lenders could create. As a substitute of gathering the originated loans on their financial statements, lenders were capable to plainly sell the loans in the secondary financial market...
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...Subprime mortgage crisis is defined as a nationwide banking emergency that coincided with the U.S. recession of December 2007 – June 2009. This incident had been analyzed from various aspects as it redefined the world economy and the largest banking and financial institutions of the world. A major American financial services company Citigroup suffered the crisis caused by manifold contributing reasons that could be triggered and prevented prior to the crisis, is analyzed here. Secondary data had been used here to formulate the thorough study from sources like Reuters, Sonntag, Barnett-Hart. Excessive issuance of CDOs by Citigroup to reallocate risk, regulate capital relief and earn greater profit was the substantial reason of its distress. Besides insufficient risk management resulting from risk managers’ cronyism and retransfer of huge amount of troubled assets back into its balance sheet to avoid the forego of its institutional clients due to shadow banking added to the situation. The crisis resulted in a numerical loss of $18.72 billion and around 100000 job cuts during 2008 period. Government aid like bail-out and internal restructure was implemented by this giant institution to overcome the distress. An analysis, backed by the study of the overall mishap suggests that, providing Citigroup with independent risk management, credit rating of its internal departments with stricter regulations, audits and checking rather than profit oriented private rating agencies and deeper...
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...Subprime Meltdown: American Housing and Global Financial Turmoil The real estate and financial crisis was caused by a significant rise in mortgage delinquencies and foreclosures, leaving repercussions for banks and financial markets globally. The subprime mortgage crises started to become apparent in 2007 resulting in a weakening global financial system. An estimated 80% of US mortgages held by the subprime borrowers were adjustable rate mortgages. Once housing prices reached their peak during the middle of 2006, the steep decline that followed made refinancing difficult. Adjustable rate mortgages began to reset at higher rates resulting in increasing mortgage defaults. Financial firms which held most of the securities backed with subprime mortgages were left with securities with no value. Ultimately, credit around the world tightened as the capital in many banks and US government sponsored enterprises were losing value. What caused the crises can be attributed to a number of factors; the failure of homeowners to meet their mortgage payments, the adjustable rate mortgages resetting along with the extensive lending. In 2008 the mortgage industry played a crucial role in the recession when an estimated 1.5 million homeowners defaulted on payments lending to foreclosure by 2009. As a result, the mortgage industry has restructured limiting individuals to purchase homes. From 2000-2006, home foreclosures began to rise. Thus the government began to investigate the practices...
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...What role did the accounting profession play in the recent subprime mortgage crisis? What could they have done differently? In all businesses, accounting is the backbone that holds them together. In stating this, the demise of the subprime mortgage industry lies within the bad practices of mortgage companies, banks and financial institutions. Allowing the lending of billions of dollars to non-credit worthy individuals was a disaster waiting to happen. During the 1980’s the subprime market comprised of approximately 5% loans and by 2005 they were at a record-breaking 20%. The decisions that allowed the increase of so many subprime loans have put this country in financial turmoil. The Subprime loan market allowed lenders to make loans to non-credit worthy borrowers, which included no-credit or bad credit individuals and those with stated income. These loans were attractive to a vast number of people because it was an offer borrowers couldn’t refuse. The little to no credit requirements and Interest-only and Adjustable-rate loans made borrowers believe they could live the American dream. The failure of risk management in these cases compromised the securitization of loans and debt obligations. The inability and/or lack of accounting principles have contributed to this country’s financial crisis, not to mention the global impact from defaulting on subprime loans. These issues still play an important role of the finance industry today. Now that the government has had to step in...
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