...which is focusing on subprime mortgages and the housing market bubble. The paper will also analyze Fannie Mae and Freddie Mac and how they are linked to the subprime mortgage crisis, including potential solutions to the crisis. References have been added to each section to show which references are being used in which section. References will be added as needed. 1) Abstract a. 120 word overview of paper 2) Introduction a. Introduction to the topic of subprime mortgages and the housing market bubble. b. Timeline of the crisis and housing market bubble burst 3) Discussion Content a. Definitions and background information on the following topics: i. Mortgages ii. Housing Market iii. Subprime Mortgages 1. Demyanyk, Y., & Van Hemert, O. (2011). Understanding the Subprime Mortgage Crisis. Review of Financial Studies, 24(6), 1848-1880. 2. Karikari, J., Voicu, I., & Fang, I. (2011). FHA vs. Subprime Mortgage Originations: Is FHA the Answer to Subprime Lending?. Journal of Real Estate Finance and Economics, 43(4), 441-458. doi.10.1007/s11146-009-9218-7. iv. Housing Market Bubble Burst b. Overview and causes of the subprime mortgage crisis i. Fixed mortgage versus floating 1. Demyanyk, Y., & Van Hemert, O. (2011). Understanding the Subprime Mortgage Crisis. Review of Financial Studies, 24(6), 1848-1880. ii. High risk mortgage loans and lending/borrowing practices 1. Peterson, C.L. (2009). Fannie Mae, Freddie Mac, and the Home Mortgage Foreclosure Crisis....
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...the Preliminary Report would answer. For example, the first paper would explain who was affected by Katrina, what Katrina was, and so on. Section III presents questions that the Preliminary Report would not answer but would describe. For example, the first paper would point out that experts are still debating whether the Army Corps of Engineers was negligent. You don’t have to answer these questions in your report, just mention what a few such questions are. In these examples section IV looks at possible answers to the research question. In your actual paper you’ll present one answer—the one you think is best—and a very brief (1-2 sentences) explanation of why you think that answer is best. Topic: Hurricane Katrina Subtopic: Government response and public reaction Research Question: Why was the public unhappy with the government’s response to Katrina? I. Introduce the overall topic, explain basic info about that topic a. Who: People of the south surrounding N.O. b. What: Big hurricane that devastated the land. c. Where: Southeastern United States (i.e. Louisiana, South Florida, Mississippi). d. When: End of August 2005. e. Why: High Pressure, Low Pressure, Warm temperature, and combos. Natural Disaster, global warming, linked to climate change. II....
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...from developing nations due to ongoing trade imbalances.[9] These factors drove a large increase in demand for high-yield investments. Large investment banks connected the housing markets to this large supply of savings via innovative new securities, fueling housing bubbles in the U.S. and Europe.[10] Many institutions lowered credit standards to continue feeding the global demand for mortgage securities, generating huge profits which its investors shared. They also shared the risk. When the bubbles developed, household debt levels rose sharply after the year 2000 globally. Households became dependent on being able to refinance their mortgages. Further, U.S. households often had adjustable rate mortgages, which had lower initial interest rates and payments that later rose. When global credit markets essentially stopped funding mortgage-related investments in the 2007-2008 period, U.S. homeowners were no longer able to refinance and defaulted in record numbers, leading to the collapse of securities backed by these mortgages that now pervaded the system.[10][11] The failure rates of subprime...
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...Government Mortgage Programs RES301 Real Estate Principles Government Mortgage Programs such as Fannie Mae, Freddie Mac, FHA, and the VA Loan program are all integral parts of our nation’s main home lending programs. Each provides their own benefits to those who choose to take advantage of them. This paper will go into depth about how these programs affect the real estate market financially, ethically, legally, dynamically, and according to the valuation process. Understand that each program provides integral assistance to the normal avenues of attaining loan assistance, and it is integral that each program maintains their ability to function based off of their intended uses. First, it is important to understand what each government program is and what it provides. Homebuyers who do not qualify for prime mortgages typically obtain mortgages that require them to obtain insurance either through FHA loans guaranteed by the government or (higher-priced) subprime loans secured by private mortgage insurance” (Karikari Voicu Fang, 2011). This tells us that these programs are highly desirable for those who might not be able to afford a general home loan. Fannie Mae was originally created as the Federal National Mortgage Association in 1938. It was used to “provide a secondary market for FHA-insured mortgages, and later, VA guaranteed loans” (Archer Ling, 2013). Freddie Mac was originally created to “create an active secondary market...
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...some unpleasant answer as it would show nothing but the quicksand of capitalism, the dominating economic policy of present world. According to the expert’s observation and, of course, based on the data of the happenings within the financial sectors, to find out the immediate causes of current global economic downfall, we need to go a little back in past and understand what was happening in the housing sector of America for past many years. Background and causes The immediate cause or trigger of the crisis was the bursting of the United States housing bubble, which peaked in approximately 2005–2006. High default rates on "subprime" and adjustable rate mortgages (ARM), began to increase quickly thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. 01. Growth of the housing bubble Between 1997 and 2006, the price of the typical American house increased by 124%. During the two decades ending in 2001, the national median home price ranged...
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...CORPORATE FINANCE 307 LITERATURE REVIEW Student Name / ID: Chay Yu Xi 15907811 Jacqueline Teo Hui Yun 15805054 Ting Heng Huat 14973837 Tutor: Leo Kee Chye Tutorial Day / Time: Monday / 2pm Table of Contents Abstract The Tech Bubble Introduction Lowering of Interest Rates Adjustable Rate Mortgage Securitization Mortgage Backed Securities Collateralized Debt Obligation Credit Default Swap Government Reaction and Policies Emergency TARP Repercussions Basel Disadvantages Future Policy Requirements Controversy Conclusion Reference List Review of the causes of the 2008 Financial Crisis in US. Abstract This paper seeks to summarize a stream of research that has delved into the major causes of the financial crisis in 2008. More precisely, we will be looking at a combination of causes such as the sub-prime mortgage crisis, the mortgage backed security, the collateralized debt obligation as well as how the incidental credit-default swap contributed to the incident. This paper will begin from analyzing the past, when it happened and how it built up and resulted in the financial crisis. The significance of this literature review seeks to give a simplified explanation of the financial crisis of 2008 and will be useful for the people unversed in economics or finance but wish to have a basic understanding of its causes and history. The Tech Bubble During the early 2000, numerous companies and individuals bought new operating...
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...often trigger the onset of a recession. The global recession of 2008-2009 brought a great amount of attention to the risky investment strategies used by many large financial institutions, along with the truly global nature of the financial system. As a result of such a wide-spread global recession, the economies of virtually all the world's developed and developing nations suffered extreme set-backs and numerous government policies were implemented to help prevent a similar future financial crisis. A recession generally lasts from six to 18 months, and interest rates usually fall in during these months to stimulate the economy by offering cheap rates at which to borrow money. The sharp decline in economic activity during the late 2000s, which is generally considered the largest downturn since the Great Depression. The term “Great Recession” applies to both the U.S. recession – officially lasting from December 2007 to June 2009 – and the ensuing global recession in 2009. The economic slump began when the U.S. housing market went from boom to bust and large amounts of mortgage-backed securities and derivatives lost significant value. The Great Recession officially lasted from December 2007 to June 2009 began with the bursting of an 8 trillion dollar housing bubble. The resulting loss of wealth led to...
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...reason for the rise in house prices is the Federal Reserve’s policy of maintaining low interest rates after the 2001 recession. Under these market situation, mortgage loan and mortgage backed securities market became more popular and bigger. The financial markets’ appetite for mortgage product also resulted in more creative and complex financial products and strategies such as MBS (Mortgage-backed securities), CDO (Collateralized debt obligation), ABCP (Asset-backed commercial paper), Conduits, SIV (Structured investment vehicles). For example, according to the case, the S&L crisis also boosted the securitization of mortgages by two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Starting with bundles of mortgages purchased from mortgage originators, the GSEs created and sold mortgage-backed securities (MBSs), which delivered to holders the payments made on these mortgages. In exchange for a fee, the GSEs guaranteed the interest and principal on these loans. This meant that, assuming the GSEs remained solvent (or that the government came to their rescue if they found themselves in financial trouble), the only payment risk faced by the holders of these MBSs was the risk that the underlying mortgages would be repaid before they were due (known as prepayment risk). At that time, Popularity of “Subprime...
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...Index | 1 | The Introduction | 2 | Financial Subprime Mortgage Crisis Causes | 3 | Introduction & Background to the Situation of the Egyptian Economy prior to the Global Financial crisis | 10 | Financial Subprime Mortgage Crisis Impacts on Egypt | 13 | The Egyptian Economy & the crisis | 21 | The Conclusion & Solutions | 23 | The References | 27 | The Introduction In the second half of 2008, the world economy went through a serious financial upheaval that sparked off in the United States and spread to Europe and the rest of the world. The negative consequences of this financial crisis had bitten the Egyptian economy in many fields. Egypt’s growth rate witnessed setbacks and may have posted its slowest annual growth in half a decade in 2008–2009 as the global crisis hit revenue from tourism, migrant labor remittances, the Suez Canal, export revenues, and investment. The severity of the crisis and its uncertainties demonstrated the need for urgent action to restore financial stability, lead the economic recovery and secure a sustainable future for the country. This paper therefore critically discusses the current global financial crisis and its impact on Egypt. It presents an overview of the Egyptian economy prior to the crisis, followed by an assessment of the depth and impact of the crisis on sectors of the Egyptian economy. Additionally, the paper highlights the actions taken by the Egyptian government to weather the effects of the crisis and concludes...
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...Finance: the study of how individuals, institutions, governments, and businesses acquire, spend, and manage money and other financial assets Financial Environment: encompasses the financial system, institutions or intermediaries, financial markets, business firms, individuals, and global interactions that contribute to an efficiently operating economy Financial Institutions: organizations or intermediaries that help the financial system operate efficiently and transfer funds from savers and investors to individuals, businesses, and governments that seek to spend or invest the funds in physical assets Financial Markets: physical locations or electronic forums that facilitate the flow of funds among investors, businesses, and governments Two Themes: Entrepreneurial Finance: study of how growth-driven, performance-focused, early-stage firms raise financial capital and manage operations and assets Personal Finance: study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth Why Study Finance: to make informed economic decisions; to make informed personal and business investment decisions; to make informed career decisions based on a basic understanding of business finance Six Principles of Finance: Time Value of Money: understand the economic behavior of individuals and the economic decisions of the institutions and businesses that they run; principle pillar apparent in many of our day-to-day...
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...Islamic Finance: A Therapy for Healing the Global Financial Crisis Miranti Kartika Dewi 1 *Researcher of Centre for Islamic Economics and Business ** Lecturer of Department of Accounting Faculty of Economics, University of Indonesia Ilham Reza Ferdian * Student of Master of Science on Finance Programme Kuliyyah of Economics and Management Sciences International Islamic University Malaysia ** Fellow of PT. Bank Muamalat Indonesia ABSTRACT Global financial crisis which hit many too-big-too-fail countries and financial institution in the world was mainly made happen by debt securitization. Derivative instruments resulted from this process obviously were not backed by real asset. When any party came up with investment on these instruments, the investment would never support the development of real sector economy, instead, it just worsen the situation by creating bubble economic. This condition becomes more harmful when the securitized debts default. This practice is strictly forbidden according to Islamic finance principles. It has inherent risk management tools to prevent the crisis. This paper attempts to examine the root of the financial crisis and find the solution from Islamic finance principles. Keywords: Financial crisis, Derivative, MBS, CDO, CDS, Islamic finance 1 Corresponding author can be contacted by email: miranti_k_dewi@yahoo.com. “The credit and capital markets have grown too rapidly...
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...associated mortgage losses and that the effects of them were amplified by vulnerabilities in the economy and financial system. He allocates such private vulnerabilities: * Borrowers and lenders took on too much debt * Banks and other financial institutions failed to adequately monitor and manage the risks they were taking * Firms relied on short term funding such as commercial paper * The increased use of exotic financial instruments concentrated risk Public sector vulnerabilities: * Gaps in regulatory structure * Supervision of banks and bank holding companies (FED did not press hard enough on the issue of measuring a risk) and many banks did not have a capacity to understand the risk, they were taking, and supervisors should press them harder to develop the capacity. * There were failures in the regulation of the customer protection * Individual agencies looked at different parts of the business and nobody was really in charge in looking to see whether there was problems related to the overall financial system * Fannie Mae and Freddie mac that were operating with an inadequate capital to back their guaranties. Their balance sheets grew rapidly exposing them to additional risk. * Bad mortgage products and practices such as non-doc loans repayment of which depended on continually rising prices of houses. When house prices stopped rising borrowers could not neither refinance nor meet the payments on the exotic mortgages. * Subprime...
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...of 2008 has affected so many people across the nation. With the current unemployment rate at 8.2 percent, (less than .5 percent away from where it was the first year of the Great Depression) many people have lost their homes due to not being able to pay high mortgage costs. Everyone knows at least one family who has been affected by the collapse. Some may say it started because of bad mortgage lending, others say it is because people got in to mortgages that were beyond their means. I believe the crisis has to do with everyone involved in the picture; policymakers, lenders/banks, and consumers. I was born and raised in San Diego, California. My Mother and Father brought me up with the idea that owning real estate is always a good investment. At age 20, I had a great job making between 60,000- 80,000 dollars annually and the first thing I did when I was able to save up for a down payment was that I purchased a townhouse 13 miles from my hometown. Seeing housing prices continue to rise I knew that if I did not purchase then, I would never be able to. Being a first time buyer, I did not have enough knowledge about lenders, and the different mortgage plans they offered. I ended up going with one of the Adjustable rate mortgages as I was told...
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...Goldman Sach vs. SEC By: Lemar Clayton The Goldman Sachs situation presents a leadership ethics dilemma. Is it okay for banks to bet against their customers to manage risk and hedge their bets? In fact, I’m willing to bet that opposing sides in the argument don’t even see this as a dilemma. “The senate subcommittee grilled Goldman executives for 11 hours because they clearly think that what Goldman did was morally wrong, if not illegal.” ("Sec charges goldman," 2010) Contrast that with Goldman’s shareholders, who probably think it’s unethical for Goldman’s executives not to hedge against a mortgage collapse. There is a middle position that says the hedging itself wasn’t wrong, it was how Goldman did it that was questionable. Goldman should have disclosed its short position and possibly even details about the origins of those CDOs to customers. Let me begin by explaining what is a CDO, Goldman takes a reference portfolio, or a bunch of bonds. A bond is a formal contract to repay borrowed money with interest at fixed intervals. Each set of bonds is senior to all the bonds below it, and they pay principle in order of their seniority. You can view it as a pyramid with different slices. The portfolio is giving a rating by Wall Street. Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays. Level E will take losses before D, and level C will take losses before B. It’s important to note the bonds don’t have...
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...The Mortgage and Financial Crises: The Role of Credit Risk Management and Corporate Governance William W. Lang Federal Reserve Bank of Philadelphia Ten Independence Mall, Philadelphia, PA 19106 Phone: 215-574-7225 E-mail: William.Lang@phil.frb.org Julapa Jagtiani Federal Reserve Bank of Philadelphia Ten Independence Mall, Philadelphia, PA 19106 Phone: 215-574-7284 E-mail: Julapa.Jagtiani@phil.frb.org February 9, 2010 Abstract This paper discusses the role of risk management and corporate governance as causal factors in the onset of the financial crisis. The downturn in the housing and mortgage markets precipitated the first phase of the financial crisis in August 2007 when the solvency of a number of large financial firms was threatened by huge losses in complex structured financial securities. Why did these firms have such high concentrations in mortgage-related securities? Given the information available to firms at the time, these high concentrations in mortgage-related securities violated basic principles of modern risk management. We argue that this failure was a result of principal-agent problems internal to the firms and to breakdowns of corporate governance systems designed to overcome these principal-agent problems. Forthcoming in Atlantic Economic Journal (2010) JEL Classification Numbers: G01, G18, G21, G28 Keywords: Financial Crisis, Risk Management, Corporate Governance, Subprime Crisis _________________________ The opinions expressed in this paper...
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