...Subprime Special 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, 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." Subprime lending is also called B-Paper, near-prime, or second chance 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 lending crisis, which began in the United States has become a financial contagion and has led to a restriction on the availability of credit in world financial markets. Hundreds of thousands of borrowers have been forced to default and several major subprime lenders have filed for bankruptcy. Types of subprime lending Subprime mortgages Subprime mortgage loans are riskier loans in that they are made to...
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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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...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 subprimemortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. The percentage of new lower-quality subprime mortgages rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S.[1][2] A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages.[3] These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products.[3][4] Further, U.S. households had become increasingly indebted, with the ratio of debt to disposable personal income rising from 77% in 1990 to 127% at the end of 2007, much of this increase mortgage-related.[5] After U.S. house sales prices peaked in mid-2006 and began their steep decline forthwith, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending.[1] Concerns about the soundness...
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...Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis in 2008. According to Jenny Anderson and Erick Dash’s article, “For Lehman More Cuts and Anxiety”, Lehman's loss was a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages. During the years of the housing boom Lehman Brothers was increasing its revenue. They were increasing their profits from all of the home mortgages. Leman Brothers acquired subprime mortgage lenders. Between the year 2004 and 2006 Leman Brothers real estate business enabled revenues in the capital market to increase by 56%, giving the firm a securitized 146$ billion in mortgages in 2006. In 2007 the firm reported a net income of a record 4.2 billion on revenue of 19.3 billion (Case study p.1). Everything was going well for Lehman Brothers between 2005 and 2007. In beginning of 2007 Lehman’s stock prices had reached a high record. Unfortunately soon after that subprime mortgages began to default. Stocks for Lehman Brothers dropped dramatically after the default in subprime loans and from the start of the crisis. During the default in the subprime loans, Lehman Brother’s closed its subprime lender, eliminating 1,200 jobs in 23 of their locations. During the crisis in 2007 Lehman Brother’s leverage ratio jumped to 31 from 24 in 2004 (Case Study p.2). The leverage ratio shows how much more risky the company became. After Bear Stearns...
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...of mortgage brokers, spurred on by an overzealous government, that have resulted in the collapse of the housing market and the subsequent decline of the American economy. It also reviews the proper role of subprime mortgages in the market as well as an analysis of the systemic effects of the subprime mortgage market on the global economy. Introduction The problem to be investigated is how the subprime loan market influenced the market collapse of 2008. The unethical practices of mortgage brokers, spurred on by an overzealous government, resulted in the collapse of the housing market and the subsequent decline of the American economy. This in turn affected worldwide markets and has led to instability throughout the world as countries scramble to shore up their economies with loans and bailouts. Ethics of Subprime Mortgage Brokers While the ethics of subprime mortgage brokers can certainly be questioned, they cannot take the brunt of the blame for the crisis that befell the economy beginning in 2007-2008. Economist Lawrence White attributes the financial collapse of 2008 with the political effort to expand home ownership to those people who were not qualified under traditional market constraints (Yandle, 2010, p.346). Nevertheless, the attractiveness of the subprime loan market to brokers cannot be denied as the significant growth of that market between the years of 1994 and 2008 was accompanied by an increase in wealth for many lenders. The greatest growth occurred between...
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...Subprime Lending Discuss in detail the event, the people involved, and its background and impact of America. Before 1930, features of Housing loans presented significant challenges. To obtain a home loan a down payment of half the value the house was required. Further issues with these loans were large balloon payments and short maturities. The pricing for mortgage loans varied widely due to no nationwide housing market. The main funding for these loans was provided by life insurers, thrifts, and commercial banks. By 1932, a housing crisis was wreaking havoc on home loans. The estimated defaulted loans were rising to twenty –five percent. In response to this crisis, the FHL Bank System was designed to provide relief to lending institutions and homeowners. In 1933, President Roosevelt birthed two Acts regarding the housing market. The first was the Home Owners Loan Act. This act established the HOLC, which was designed to slow down the quickly rising foreclosure rate. Under this act, long-term self-amortizing fixed rate mortgages became the new norm. The second act in the New Deal was the National Housing Act. The FHA was created in this act. This protective measurement was used to help the lenders maintain foreclosed homes by adding automatic insurance payments to active loans. The FHA also expanded the use of a fixed rate long-term home loan. In 1938, the American government formed Fanny Mae to provide a secondary market for home mortgages. This secondary market gave...
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...JARAF The Journal of applied research in accounTing and finance V O L U M E 3 , i s s U E 1 , 2 0 0 8 Old Wine in New Bottles: Subprime Mortgage Crisis – Causes and Consequences Michael Mah-Hui Lim Information Lost: A Descriptive Analysis of IFRS Firms’ 20-F Reconciliations Marlene Plumlee and R. David Plumlee Negative Goodwill: Issues of Financial Reporting and Analysis Under Current and Proposed Guidelines Eugene E. Comiskey and Charles W. Mulford Electronic copy available at: http://ssrn.com/abstract=1263280 JARAF The Journal of applied research in accounTing and finance Publication Information JARAF - The Journal of Applied Research in Accounting and Finance is a scholarly peerreviewed journal jointly published by The Centre for Managerial Finance at Macquarie Graduate School of Management and the Faculty of Economics and Business at The University of Sydney. All journal articles published in JARAF are subjected to double-blind peer-reviews by qualified international experts. Months of Distribution: July – December Current Edition: Volume 3, Issue 1 (2008) ISSN 1834-2582 (Print) ISSN 1834-2590 (Online) Editors Tyrone M. Carlin Professor of Financial Reporting & Regulation Faculty of Economics and Business The University of Sydney NSW 2006 Australia Nigel Finch Director, Centre for Managerial Finance Macquarie Graduate School of Management Macquarie University NSW 2109 Australia Editorial Advisory Board Edward I. Altman Max L. Heine Professor...
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...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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...Defining Subprime Lending The problem to be investigated is the effect of subprime mortgage loans on the economy. According to Merriam Webster subprime is defined as having or being an interest rate that is higher than a prime rate and is extended especially to low-income borrowers; extending or obtaining a subprime loan (Webster, 2012). Subprime mortgage loans are loans given to people with a low credit score. Subprime borrowers normally don’t qualify for prime loans or prime lending. According to Jennings, the subprime mortgage market is defined to include those borrowers with a FICO (Fair Isaac Co.) score below 570 (Jennings, 2012, p. 434). The American Dream Home ownership has always been a big part of the “American Dream.” It allows you to have your piece of “the rock.” It gives one the ability to invest in your community. This need to have a piece of the American dream not only drives the average American to capitalize, it also drives mortgage lenders to take their portion of your dream as well. Initially, this relationship tends to have win/win connotations; however, true colors eventually prevail when dealing in subprime mortgage loans. Subprime Lenders It seems subprime lenders never call themselves just that. You have to be aware of the enormously high prices; prices much higher than your prime lenders. Subprime lenders based their rates and fees on the same factors as prime lenders. For example, rates were higher the lower the credit score and the...
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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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...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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...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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...Subprime Meltdown in terms of Treasury Spreads. Name: Course: Institution: Instructor: Date: The renown financial market meltdown in the United States began in the summer of 2007.The financial meltdown started with the drastic collapse in the housing prices and a significant increase in the inventory of homes that were unsold as well as the notable rise in home foreclosure especially in the beginning of 2007.A subprime mortgage is the many home loans that were taken out during the historic housing bubble in the United States. The home loans had been given at subprime rates. However, this resulted in the large-scale foreclosure on the same home loans since people were forced to leave their homes since they could not afford to pay the loans. At the point in time when the subprime mortgage began to thrive, the housing bubbled came into play (Eichengreen, Nedeljkovic, Mody & Sarno, n.d.). This relates to a period when the value of house drastically increased, and people would borrow at less rates than the lowest rates in the market. Consumers anticipated that later the prices of their homes would considerably rise, and they would be in a position to refinance at lower payments. However, the problem with this notion is that most of the consumers didn’t refinance for lower payments only, they went ahead and refinanced for their personal spending. The inflation levels on home prices indicated that the homeowners had more equity to spend as they please. Financial...
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...In over half a century since the World War II ended ten recessions succeeded it. However, The Great recession of 2007 was the longest, deepest, widest and most severe of them all, as 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...
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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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