...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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...Products……………………………………………………………………………………………….7 Re-Securitization……………………………………………………………………………………………..8 Contribution of these products towards Financial Crisis…………………………………..8 Improper Risk Management role in Financial Crisis………………………………………….9 Risks………………………………………………………………………………………………………………..10 Market Risk……………………………………………………………………………………………………..11 Credit Risk……………………………………………………………………………………………………….11 Liquidity Risk……………………………………………………………………………………………………11 Interest Rates and the Financial Crisis………………………………………………………………12 Relation between low interest rate and financial crisis…………………………………….12 Role of Rating Agencies……………………………………………………………………………………14 Structure Finance Products and Rating Agencies……………………………………………..14 Regulations Then and Now………………………………………………………………………………15 BASEL II……………………………………………………………………………………………………………16 Enhancements of Basel II…………………………………………………………………………………18 The Resecuritisation Exposure Using IRB Approach………………………………………….18 The Resecuritisation Exposure Using Standardized Approach…………………………..18 Operational Criteria for Credit Analysis……………………………………………………………19 Securitization Liquidity Facilities – Standardized Approach………………………………19 Conclusion……………………………………………………………………………………………………….21 SOURCES …………………………………………………………………………………………………………22 Financial Crisis and Finance Introduction and Background: The financial crisis which peaked in 2008...
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...A PROJECT REPORT ON US SUBPRIME CRISIS REFERRING TO IT’S ORIGINS SUBMITTED TO THE UNIVERSITY OF MUMBAI AS A PARTIAL REQUIREMENT FOR COMPLETING THE DEGREE OF M.COM (BANKING AND FINANCE) SEMESTER I SUBJECT: FINANCIAL SERVICES & MANAGEMENT SUBMITTED BY: PILLAI ANUJA SURESH ROLL NO.: 42 UNDER THE GUIDANCE OF Ms.BHAVIKA DAVE SIES COLLEGE OF COMMERCE AND ECONOMICS, PLOT NO. 71/72, SION MATUNGA ESTATE T.V. CHIDAMBARAM MARG, SION (EAST), MUMBAI – 400022. | | CERTIFICATE This is to certify that ___________________________________ __________________________________________________________ of M.Com (Banking and Finance) Semester I (academic year 2013-2014) has successfully completed the project on ______________________________________________________under the Guidance of Ms. __________________________________________. _________________ ___________________ (Project Guide) (Course Co-ordinator) ___________________ ___________________ (External Examiner) (Principal) Place: _____________ Date: ___________ DECLARATION I, __________________________________________________ Student M.Com (Banking and Finance) Semester I (academic year 2013-2014) hereby declare that, I have completed the project on ______________________________________________________________. The...
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...It is reasonable to say that the recent subprime mortgage crisis happened due to a complex combination of negligent practices by many of the multiple stakeholders directly involved in the real estate industry. That being said, the accounting profession, being the critical player that it was (and still is), played a critical role in the development of this economic crisis due to the practices that they used during the auditing process of key industry players in the market at that time. As a foundation to this argument, chapter one of the text states that, accounting is the process of identifying, measuring and communicating economic information about an organization for the purpose of making decisions and informed judgments. (Marshall-McManus-Viele). It is the accountants responsibility to identify and offer the relevant financial data necessary to make appropriate business decisions. In reading about cases such as the infamous New Century “mishap”, one gets the impression that the accounting methods used, completely misrepresented the current financial situation of the company which needed to show a strong financial situation in order to maintain it’s solid market position and continue to see a steady influx in transactions. After further review combined with KPMG’s involvement, they found themselves with inconsistencies that led to a more than significant hole in their numbers ultimately leading them to bankruptcy (along with other economic factors). Referring back...
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...How does this subprime crisis happen? Firstly, Professor Robert Shiller, who is a leading authority on speculative bubbles, has pointed out that the subprime crisis was essentially started psychologically. He argues that it is the misguided thinking about the real estate market that will keep raising. However, the house pricing was actually falling. Then it leads to a large number of loan defaults on the subprime market, many subprime lenders were suffered from a great losses and a liquidity problem. A large number of bankruptcy of subprime lenders lead to credit crunch which causes a sudden decrease of liquidity in the whole market. Psychologically, the buyers in US who they do not know which securities are subprime mortgages and they scared to buy, so they stop buying the securities (reference). Furthermore, it leads to a deeper decrease of liquidity or funding to all financial institutes. After a large and complex chain effect, it leads to a huge decrease on the stock markets around the world. And this ends up as subprime crisis. Many financial institutes are facing difficulties during this period of time. Some of the world’s largest and leading banks and investment bank were once facing bankruptcy, which may lead to an economic tragedy. In the following report, it will compares the case of Bear Stearns, the fifth largest investment bank in US, and Northern Rock, one of the largest bank in UK. And we will also discuss about the way how the US Federal Reserve and the government...
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...Subprime Mortgage Crisis 1. What is Subprime Mortgage? A type of mortgage that is normally made out to borrowers with lower credit ratings. As a result of the borrower's lowered credit rating, a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan. Lending institutions often charge interest on subprime mortgages at a rate that is higher than a conventional mortgage in order to compensate themselves for carrying more risk. There are several different kinds of subprime mortgage structures available. The most common is the adjustable rate mortgage (ARM), which initially charges a fixed interest rate, and then converts to a floating rate based on an index such as LIBOR, plus a margin. The better known types of ARMs include3/27 and2/28 ARMs. ARMs are somewhat misleading to subprime borrowers in that the borrowers initially pay a lower interest rate. When their mortgages reset to the higher, variable rate, mortgage payments increase significantly. This is one of the factors that lead to the sharp increase in the number of subprime mortgage foreclosures in August of 2006, and the subprime mortgage meltdown that ensued. Many lenders were more liberal in granting these loans from 2004 to 2006 as a result of lower interest rates and high capital liquidity. Lenders sought additional profits through these higher risk loans, and they charged interest rates above prime in order to compensate...
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...greed and self-interest (Geelan T. , 2011). Community banks had nothing to do with sub-prime lending or the resulting financial crisis, yet they are being caught in the net of the overly far-reaching response. Community banks are the life-blood of the communities they serve. They meet the financial needs of consumers, families, small businesses, foundations and not-for-profit organizations. When the too-big-to fail institutions were worried about their credit default swaps, derivatives, sub-prime loans, and the Troubled Asset Relief Program (TARP) they turned off the lending spigot, while community banks didn’t stop lending (Geelan T. , 2011). So how did we get to where we are? At one point in time, banks would refuse to lend money to people with poor credit history or no income. There were pretty tight qualification guidelines to obtain a mortgage. At that same time, back in the early 2000's, there was “excess capital” globally (The Subprime Mortgage Crisis Explained, 2011). Investment managers were looking for ways to invest money; generally the demand was for low-risk investments that would yield a nice return. However, such investment options were not easy to find. This pushed a great amount of money straight into the U.S. mortgage market, thanks to the unique and wonderful (on principle) vehicle – securitization (The Subprime Mortgage Crisis Explained, 2011). After an individual gets a mortgage loan from a broker, the broker sells the mortgage to a bank, the bank in...
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...Introduction Currently the United States is in the midst of the worst global financial crisis of the 2l century, which traced its origins to the sub-prime mortgage disaster that began to unravel in 2007. The shocks of global crisis are devastating: homeowners filed for bankruptcies and faced foreclosures in record high numbers, leading Wall Street firms such as Bear Sterns and Merrill Lynch crumbled under their massive exposure to sub-prime mortgage holdings that turned into toxic had assets and over $50 trillion in wealth had been wiped out within the last two years. No financial crisis since the Great Depression prompted many policy reactions as governments scrambled to map out rescue plans to restore stability and revive economic growth. The after effects of the sub-prime mortgage meltdown have left policymakers both in the United States and around the world struggling to restore growth and confidence in their economies. What are the causes behind the U.S. sub-prime mortgage crisis? Is one cause more responsible than another? Why of why not? The principal cause of the economic slowdown was the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world. The immediate trigger of the crisis was the end of housing booms in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. sub-prime mortgage...
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...The Subprime Mortgage crisis ECO 2072 Principles of Macroeconomics In the beginning One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage opened a new door for those looking to accomplish the “American dream”. “Since, 1998 more than 7 million borrowers bought homes with Sub-prime loans. One million of those homeowners have already defaulted on their loans (Atlas , 2007). The of Rise Subprime Lending There are two types of mortgages in the U.S.: fixed-rate mortgages (FRMs), which allow a fixed amount of interest for the duration of the loan, and the adjustable-rate mortgages (ARMs) are loans with variable interest rates. Subprime mortgages are a combination of both FRMs and ARMs, because they provide for a fixed rate for the first 2-3 years as “teaser-rate”, following this period the interest rate becomes adjustable semi-annually (Kirk). Subprime mortgage is a type of mortgage...
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...profession play in the recent subprime mortgage crisis? The accounting professions played a critical role, and somehow were pointed fingers at mostly, in the recent subprime mortgage crisis. According to Chapter 1 of our book, the accounting professions analyze financial statements, which provide information that is relevant to make rational investment, credit decisions, and other informed judgments to users such as, investors, creditors, and financial advisors. However, accountants and auditors were not the only ones liable here. The subprime crisis was a big disarray, and everyone starting from the lenders, to the homebuyers, and to the investors had got to have a share to the blame. The lenders should be responsible for it because they were the ones who loaned monies to people with poor credit. The homebuyers should be as guilty as well for buying houses that they could hardly afford. Finally, the investors were to be held accountable since they were purchasing collateralized debt obligation (CDO) at low premiums instead of taking the rating at face value. Nonetheless, things happen – no one could have predicted the crisis, and sometimes it is inevitable. Yet, I believe the accounting professions could have prevented it because their job is to be independent, objective, competent, and most especially truthful with the information they evaluate. What should (could) they have done differently? Like I said above, the subprime crisis was inevitable, but it could...
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...Week I: Discussion Question What role did the Accounting profession play in the recent sub prime mortgage crisis? What could they have done differently? In the beginning of this decade, the US interest rates were at record lows, subprime lending accounted for 80% of loans being issued (Senator Dodd: Create, Sustain, Preserve, and Protect the American Dream of Home Ownership, 2007). In order to lore new borrowers, banks more often than not offered adjustable rate mortgages to their clients which provided them with lower payments compared to those offered by traditional mortgages. As subprime lending grew exponentially, investment firms and banks saw an opportunity to take advantage of the boom by securitizing the loans into new investment vehicles called Collateralized Debt Obligations (CDO)(Evans & Jain, 2010). As organizations grew their investments in CDOs, accounting professionals at these institutions played a role in misleading investors about their organization’s risks and financial health. As a way to minimize risk to their organizations, accounting professionals at a number of banks and investment firms used creative accounting maneuvers to move CDOs to Qualified Special Purpose Entities (QSPE). In doing so, they removed the liability of these assets from their organization’s books misleading investors about their organization’s health (Chasan, 2008). This kind of practice was used by several organizations including Citigroup Inc. which settled...
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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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...After the Great Depression, Unstated States had 40 years or economic growth without a single financial crisis. One of the main reasons of that achievement was that the financial sector was tightly regulated. Investment banks were small private partnerships. Thus, the money cycle was carefully observed. One of the few financial innovations was introduced in the 1970s when the Government National Association (Ginnie Mae) put together the first mortgage-backed securities (Mihm & Roubini, 2010). However, financial regulations radically changed in the beginning of 1980 as Ronald Reagen became the President of USA. He gave the starting point of 30 years of deregulations. The world of the U.S. President Thomas Jefferson “I sincerely believe... that banking establishments are more dangerous than standing armies” came popular. An important role into the deregulations played Alan Greenspan whom Reagan appointed as a chairman of the Federal Reserve Bank. He was also reappointed in Presidents Bill Clinton and George W Bush. An important for the volatility of the marker has the violation of Glass-Steagel act (which prevented banks with consumer deposits from engaging in risky investment banking activities ) by creating the Gream-Leach-Bliley act which overturned Glass-Steagel act. The American dream represents a set of ideas which are widely spread in the United States. The most important aspect of reaching the idea is represented in the ownership. It is a status symbol that differs...
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...Introduction Within the subprime mortgage loan system which involved a relationship with brokers, lenders, and potential homeowners, many seemingly unethical practices were forged in the name of American families and individuals attaining part of the “American Dream” of owning a home. While this may neither have been the direct fault of neither party, each engaged in less than moral actions that played a part in the subprime mortgage crisis. Thus, the problem to be investigated is whether or not these ethical violations ultimately led to the fall of the subprime market by causing a catastrophic domino effect on all stakeholders involved. The article Subprime Loans- The Under-the-Radar Loans That Felled a Market by Marianne M. Jennings will be used to investigate this problem. Ethics of brokers and the isolation of individual ethical choices According to Jennings (2010), the subprime market offered a vast source of wealth to lenders because of the hassle-free and lenient criteria for qualifications for potential home owners (p. 434). As a result, lenders attracted mortgage brokers that engaged in questionable ethical practices such as using the same applicant for more than one application, processing numerous applications out of greed, and even committing fraud (Jennings, 2010, pp. 434-435). The first unethical decision brokers made was to offer loans to applicants they knew would not qualify for loans under normal circumstances. Potential homeowners expected brokers...
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...The recent subprime mortgage crisis in the United States had a devastating impact not only on the economy of the United States, but also on an international level. The only way that many of those who were involved can accept the crisis and their losses is to be able to put someone at fault, which poses the question, who is to blame? This question cannot be answered simply, and involves many complications which have been researched, examined and debated over the years to try to come up with some answers. The only substantial answer that has been formulated is that everyone that was involved in any way is to blame, each for their own reasons. The two main parties involved include the lenders (mortgage companies) and the borrowers (potential homeowners). Mortgage brokers and the US Government also played a part in the way the crisis unfolded, but fell somewhere in the middle. I personally agree that each of these four groups is, in a way, at fault. Borrowers are often seen as the victims, as they were deceived into buying loans that they could not afford, and were then forced to default on their mortgages. What most people do not know is that they are also responsible for deceiving the mortgage companies in return. When attempting to purchase a mortgage, an individual must complete forms containing information about themselves and their family, their economic history, and other information that would help to determine what kind of mortgage they might qualify for. It is fairly...
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