...SUBPRIME MORTGAGE CRISIS The U.S. subprime mortgage crisis was a set of events and conditions that led to the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. What is a subprime mortgage? A subprime mortgage is a type of loan granted to individuals with poor credit histories, who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the prime lending rate. 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, plus a margin. The better known types of ARMs include 3/27 and 2/28 ARMs. What lead to the US subprime mortgage crisis? 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...
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...Research Proposal: Finance; (Financial Engineering, Financial Mathematics & Risk Management) By:Syed Asad Raza Naqvi Index Introduction and Background………………………………………………………………………….3 Interested areas for research and further study (Research Proposal)……………….3 Further explanation of the intended research topics………………………………………..4 Securitization…………………………………………………………………………………………………..4 Credit Derivatives…………………………………………………………………………………………….6 Hybrid 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…………………………...
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...Outline * 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...
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...WK 3- Subprime Mortgages This subprime mortgage mess was an obvious violation of the ethical principles of verasity, fairness and human dignity, as explained by Fr. Byron. When banks began lending to subprime borrowers a few years ago, it seemed great. Suddenly, anyone could buy a house, even with little or no money down. But not all of those borrowers were good candidates for the loan. Lenders offered interest-only loans made a lot of subprime mortgages possible. That's because homeowners were only paying the interest, and never paying down principal. The banks never disclosed the full detail of the loan to the borrowers that it will double their mortgages after certain years. The banks were only interested to sell the loan even to the people can’t afford it. The mortgage brokers were living large giving loans to anyone even people that didn’t qualify. The banks gave high incentives to the brokers to sell the ARM program to people. That’s why we saw almost every broker was offering the ARM program to home buyers. I remember one of the agents to take riskier variable rate mortgages, saying “you can always refinance later” and also telling me “I should buy as much house as I can.” Many people fell on that trapped and eventually lost their house. The banks and brokers never really cared about their clients if they can still be living in the house that they sold to them. For them, it was just another transaction. In closing, I am stating what Fr. Byron reminds...
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...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 market. Conditions in housing and mortgage markets have proved a serious pull on the broader economy...
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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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...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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...accounting 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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...Street banks, mortgage brokers, investors/speculators, Congress, the Federal Reserve, bank regulators, and individual borrowers. The period leading up to the collapse was filled with vast excesses, lax supervision, irresponsibility, 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...
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...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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...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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...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 the middle class than the poor. This ideology has been vastly agitated by politics and press. Clinton’s administration promoted paper-thin down payments and pushed for ways to get lenders to give mortgage loans to first-time buyers with shaky financing and incomes. President Bush continued the practices because they dovetailed...
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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 last depression until the Second Depression (The Great Recession) hit for America in 2007 from a mortgage loan called subprime. The following will explain the background of the subprime loans. How the government had to intervene with subprime loan. Lastly, the policies taken place with primes and different programs. The Subprime loans beginnings started in 1992, where Congress wanted to affordable housing, work on plan with Fannie and Freddie. Congress wanted the Department of Housing and Urban Development to look at their regulations. The chairperson for Fannie had a trillion dollar commenting to finance affordable homes. Homeownership had become an economic factor over the years in the mortgage market. Majority of home have loan through financial institutes. Yet, these subprime mortgage loans were given to individuals who barley sustained income and had failed credit. The purpose of the loan was suppose have a better opportunity of have homeownership. It was unfortunate subprime loans were aim toward minorities or low income areas. Lenders saw this qualities as a high risk offer the subprime loan, whereas prime loan. There subprime loan were offer to people who were not educated on loans. People did not know they had an adjustable fixed rate. Meaning the interest can flustered and get higher each month. Fannie and Freddie had nothing to do with whole subprime loan, but they...
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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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