... Page 1 Owning a home is part of the 'American Dream'. It allows people to take pride in a property and engage in a community for the long term. However, homes are expensive and most people need to borrow money to get one. Conditions were right for many people to achieve that dream in the early 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...
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...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...
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...In the spring of 2008, the world was hit by the worst Financial Crisis since World War 2. The crisis began during the Reagan administration and concluded a couple decades later with the collapse of the housing bubble. Behavioral Finance defines the term “bubble” as an event occurring before a market crash due to overvalued market prices (Ricciardi 2000). The housing bubble, which grew alongside the stock bubble in the mid 90’s, eventually burst, and a financial meltdown ensued. Initially, one bank was crippled and two of the worlds’ largest mortgage investors followed, plummeting our country deeper into debt. In this paper, I will discuss the days leading up to the housing bubble, causes of the bubble, the grim days after the bubble burst and the solutions which quelled the global crisis. The crisis began during the Reagan administration when free market believers, such as Alan Greenspan, were in power. As chairman of the Federal Reserve, Greenspan believed that any problem in the market would work itself out, and paid little attention to regulations and fraud. After Clinton was elected to office, Greenspan would team up with Robert Rubin, the assistant to Clinton on economic policy and Larry Summers, Rubins top deputy. While power shifted in New York, Washington started to look into over the counter derivatives. Washington would hire Brooksley Born, a long time securities lawyer with ties to the Clintons, of the Commodities Futures Trading Commission to step in and look over...
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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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...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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...HSBC’s Mortgage Lending Decisions and the Big Melt It isn’t often that the American financial system, and its world counterpart, has a near- death experience. The last time was the 1930s. Beginning in 2007 and extending through 2009, American and global financial systems failed, melted down, and were rescued only by concerted central bank interventions in all the major industrial countries. The United States directly invested about 1 trillion dollars in U. S. financial institutions, and guaran-teed an estimated $ 14 trillion dollars in private debt. The complete history of this period has not been written. Many causes, involving many different actors, have been identified. Some have likened the big melt to a “ perfect storm” where a number of storm systems just happened to combine to form a much larger, lethal storm. But one cause was the failure of decision- making models, both the model builders and the financial man-agers who relied on those models. One of the major players in this crisis was HSBC Holdings PLC, the third largest bank in the world based on market value, and the largest bank in Europe. In the financial meltdown of 2008— 2009, HSBC joined the other major money center banks in a collective failure. HSBC weathered the turmoil in the financial markets better than most of its rivals, mainly because it had profited from continuing growth in Asia, where it generates about 65 percent of its pretax profit. But the company’s stock prices have fallen by half from their...
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...years after the housing market crashed in 2008 the primary cause of the crash continues to be debated. Speeches have been made and books have been written on the subject. Observers and analysts have attributed the reason for the housing crisis and its collapse in the U.S. to everyone from home buyers, Wall Street, mortgage brokers, mortgage underwriters, investment banks, rating agencies, investors, low mortgage interest rates, low short-term interest rates, and relaxed standards for mortgage loans. Predatory lending was just one of many factors along this transaction chain. Predatory lending consists of loaning money to consumers in the hope and expectation that they will default and the lender will be able to take the collateral (homes.) We will discuss if the government failed to protect its citizens thru public policy and what role (if any) investments in mortgage backed securities played in the market crash of 2008 as well. While economist continue to debate who or what is at fault. The market crash clearly devastated the U.S. economy. We will also discuss how such devastation is considered to be one of the worst market failures in history. The events leading up to the crash are easier to identify after a crash, the signs were in the forefront and ignored by most people, firms, banks, and the government. Together we will embark on a journey to discover what role predatory lending, mortgage backed securities, and relaxed regulations played in the housing market crash...
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...to the Financial Crisis The near-collapse of the financial system in the United States was the most substantial economic crisis in the U.S. since the Great Depression of the 1920s and 1930s. Since the crisis began in late-2007, more than 6 million Americans have lost their jobs, large and important financial institutions have failed, and trillions of dollars in savings and retirement accounts have been lost. It is generally accepted that problems in the United States housing market are at the root of the current United States and global financial crisis. However, even in mid-2009, twelve months after the financial crisis fully erupted in the United States, it is still too early to determine all of the precise causes and consequences of the crisis. Many different entities share the responsibility for creating or enabling the crisis: mortgage lenders, borrowers, regulators, investors, rating agencies, and probably many others. At its broadest level, this crisis was caused by a failure of governance: of political governance by regulators and legislators, of corporate governance by firms and executives, and of personal governance by individuals. After peaking in the United States in 2006, the global housing bubble collapsed. On the national level, home prices in the United States have dropped by almost 40% according to the Case-Schiller Home Price Index from 2006 peak to mid-2009. Securities with risk exposure to housing market plummeted, causing great damage to financial institutions...
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...Class of: 2013 Course Title: Financial Risk Management (FRM) Semester: III Credits: 3 Course Objective & Learning Outcome: This course gives students a working knowledge of derivative instruments and their applications in managing various types of financial risks. While doing so, students would understand the organizational aspects of those risk functions and their roles & responsibilities. The emphasis is on mechanics, properties and valuation of forwards, futures, options and swap instruments. In covering these instruments, cases, examples and notes would be sought from markets so as to provide a holistic view of the financial market structure i.e., currency, fixed income, equity and money markets. Cases discussed in the class would be contemporary in nature drawn from international experience. Pre-requisites: Students are advised to be through with Financial Management I, Financial Management II and Quantitative Methods. Students are expected to go through all the reading prescribed before every class and make a meaningful contribution through active class participation. The course is delivered through a combination of case discussions, problem solving, real life risk reports and simulation. The course would have an analytical and numerical flavor and hence students are required to bring their calculators/laptops to every class. Text Book: 1. Hull, John C. & Basu, S., Options, Futures, and Other Derivatives, 7th Edison, Prentice-Hall...
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...Banking system reforms after the subprime crises Study case: Spain Author: | Supervisor: | | | Department of …………………………… January 2014 Abstract How did the Subprime Crisis, a small problem of U.S. financial markets, affect the entire global banking system? The aim of this paper is to analyze the effect of the subprime crisis on the banking sector in Europe, with a close attention on the case of Spain. Spain is currently facing the worst crisis ever experienced in its financial history, so it would be interesting to analyze what is the real situation of the banking sector and what will be the reforms that could lead to a consolidation of the financial systems. The strengths and weaknesses of the financial sector will be analyzed in order to see the changes needed to maintain its competitive position. The first part of the paper will briefly explain the subprime crisis, origins and impact on the financial world as new form of contagion. In the second chapter the consequences of the subprime crisis in the Spanish banking sector will be described. The last chapter of the thesis will present an analysis of the reforms made, using legal intervention. It will be concluded with a general point of view regarding the present situation of the Spanish banking system, the potential results of the current measures and the perspectives of new reforms. Contents 1 | Introduction | | 2 | Introducing the Subprime Crisis i. The subprime crisis: origins and evolution...
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...it lasted from December 2007 through June 2009. The collapse of the housing market in America, which is known as the Sub-prime mortgage crisis was determined to be the main cause of the great recession of 2007. This sub-prime mortgage crisis drastically affected millions of Americans as it increased unemployment, which led to an increase in poverty, thus prompting the government to respond. Mr. Claude Gerald, Retired Economics Lecturer at the Montserrat Community College, stated “The Financial Crisis of 2007 and 2008 in North America was the main cause of the recession.” He further mentioned that the year 2007 initiated an era of turmoil as the financial crisis in the United States housing market began, which led to one of the worse financial meltdowns since the great depression in 1929. Mr. Gerald explained that In the housing market, persons who wished to purchase a house but unfortunately have a credit score typically below 620 would have been issued Sub-prime mortgage loans, as they may not have been able to acquire finance otherwise considering that sufficient collateral and a healthy credit history is required. These mortgages however were affiliate with high interest rates due to the likelihood of lenders being unable to acquire repayments in full as these persons have a history of making late payments or dishonouring credit requirements. The issue of these mortgages ultimately backfired on financial institutions as homeowners defaulted their repayments (Gerald). Dr...
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...UNDERSTANDING THE SUBPRIME LENDING The term "subprime" refers to the credit status of the borrower, which is being less than ideal. Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. According to the U.S. Department of Treasury guidelines issued in 2001, "Subprime borrowers typically have weakened credit histories that include payment delinquencies i.e. non-payment of the mortgage, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories." This is when the borrowers have a poor credit history that is they are bad borrowers. Subprime lending is also called B-Paper, near-prime, or second chance lending, as the borrowing is done to customers with a poor credit history or no credit history without any security in return of the money lending. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk. Subprime lenders To access this increasing market, lenders often take on risks associated...
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...robin blackburn THE SUBPRIME CRISIS I n the summer of 2007 many leading banks in the us and Europe were hit by a collapse in the value of mortgage-backed securities which they had themselves been responsible for packaging.* To the surprise of many, the poisonous securities turned out to constitute a major portion of their ultimate asset base. The defaults fostered a credit crunch as all financial institutions hoarded cash and required ever widening premiums before lending to one another. The Wall Street investment banks and brokerages haemorrhaged $175 billion of capital in the period July 2007 to March 2008, and Bear Stearns, the fifth largest, was ‘rescued’ in March, at a fire-sale price, by JP Morgan Chase with the help of $29 billion of guarantees from the Federal Reserve. Many of the rest only survived by selling huge chunks of preferred stock, with guaranteed premium rates of return, to a string of ‘sovereign funds’, owned by the governments of Abu Dhabi, Singapore, South Korea and China, among others. By the end of January 2008, $75 billion of new capital had been injected into the banks, but it was not enough. In the uk the sharply rising cost of liquidity destroyed the business model of a large mortgage house, leading to the first bank run in the uk for 150 years and obliging the British Chancellor first to extend nearly £60 billion in loans and guarantees to its depositors and then to take the concern, Northern Rock, into public ownership. In late January Société...
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... |Financial Management | |[2007 Financial Collapse] | |This report will inform you of how the lack of oversight and management caused the financial collapse and the housing market to plummet. | [pic] TABLE OF CONTENTS Introduction………………………………………………..………… The History…………………………………………………………… Causes………………………………………………………………. The Run Up………………………………………………………… Lehman Brothers………………………………………………… Bank of America…………………………………………………… Fallout……………………………………………………………… Conclusion………………………………………………………… INTRODUCTION In 2007, the United States was in the midst of the largest mortgage and financial crisis since the Great Depression. The impact of the financial collapse caused many Americans to lose their homes and their jobs. Across the country, mortgage delinquencies and foreclosures have hit an all-time recorded high, with 11% of loans currently two or more payments behind. Complicating matters, 24% of borrowers are “underwater,” having mortgage balances greater than the values of their homes. The lack of financial management caused two large investment banks and the largest insurance firm in the world to cripple the Dow Jones Industrial Average by nearly 30% within 2-3 weeks. The financial collapse did not just affect home owners, but many financial firms were now facing...
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...foreign money flowing into the U.S. from fast-growing economies in Asia and oil-producing countries. This inflow of funds combined with low U.S. interest rates from 2002-2004 resulted in easy credit conditions, which fueled both housing and credit bubbles. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load. As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of U.S. dollars globally. While the housing and credit bubbles built, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U.S...
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