...What role did the Accounting profession play in the recent subprime mortgage crisis? What could they have done differently? There were many factors that led to the subprime mortgage crisis; low interest rates, greedy asset managers, and a booming housing market, to name a few. None were, in my opinion, more responsible for the crisis than the banks (lenders) and buyers (borrower). The banks approved loans for buyers who, one could not afford the loan, nor did not have the credit history to get the loan. Subprime borrowers were tricked into innovative mortgage products such as, 12/24 month adjustable-rate mortgages, interest-only loans, piggy-bank and the notorious negative amortization loans (Denning, 2011). These loans proved to be the catalyst that fueled the crisis in 2006. Accounting professionals played a role in the crisis, however, I feel that it was a small one. I say small due to the fact that, while they are professionals, they are still people. People with families, bills, and other obligations. I think that the pressure of having an employer pay them more because they are making more was a deciding factor for not blowing the whistle on questionable financial practices. The text speaks of ethics and unqualified, or clean opinions. “An unqualified opinion is not a clean bill of health about either the current financial condition or future prospects of the entity”. Knowing this we can surmise then even if the accounting professional did raise the flag on the risky...
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...DEFINITION OF SUBPRIME LOANS AND HOW THESE LOANS CREATE THE CRISIS The subprime mortgage crisis was a situation that led to the economic global crisis, which then also led to the recession that began in 2008. Subprime loans are type of loans that are granted to borrowers whose their credit history is not sufficient to get a conventional mortgage which means these loans are offered to people who may have difficulty in maintaining the repayment schedule of conventional loan. These loans offer interest-only loans where the borrowers only need to pay interest for each month and they does not require to make any payment of the principle for the first several years of the loan. This makes subprime loans cheaper than a conventional loan. The U.S. housing market was oversupplied and since that the monthly payments of these loans are lower, it allowed the borrowers to afford a larger home by borrowing money at cheap rates. The subprime borrowers are often turned away from traditional lenders because traditional lenders offer lower credit ratings or there might have other factors that suggest that they may fail on the debt repayment. The first cause of subprime mortgage crisis was housing bubble. During the housing bubble, most borrowers took on subprime loans because the value of houses increased and they assumed they could refinance the lower payment. They believed that they would sell the home before the interest rate increased. Unfortunately, the bubble housing began to explode in...
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...The sub-prime crisis of has led to a financial crisis in 2008-2009 that impacted many countries around the world. Discuss the cause of the sub-prime crisis and the major parties responsible. A number of parties were responsible for the sub-prime crisis during the period of 2008 to 2009. This essay will be discussing the parties responsible for the sub-prime crisis and how the individual party’s action causes the others to step deeper into the problem. As define by investopedia, sub-prime is “a classification of borrowers with a tarnished or limited credit history. Lenders will use a credit scoring system to determine which loans a borrower may qualify for. Subprime loans carry more credit risk, and as such, will carry higher interest rates as well.” The US subprime mortgage crisis was the catalysis of the finical crisis and subsequently cause the recession that began in 2008. The cause of sub-prime crisis arise from sub-prime loans or also know as sub-prime mortgage, the growth of this loan started expanding during the 1990s and such load is popularly seen in auto (car) loans, home equity (housing loans) and mortgage lending. Sub-prime loans are higher-risk loans labeled “B”, “C” and D credits, where “D” being the “worst”, resulting in a higher interest rate, which also mean a higher risk to the lenders. But it seem not to be a hindering problem, from the point of view of the finical institute who lend out the money, which will be explained later in this essay. In...
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...the greatest financial crisis of our time took place in front of our very own eyes. While some of us may have not seen this crisis upon us, but downfalls such as the one we experienced aren't built in a day. So we may ask, what could have caused this financial meltdown. According to frontline, "It all started one sunny afternoon in Florida while the employees of JPMorgan conducted meetings on how they can manage and lower risk. They concluded that separating the risk from the loan by credit default swaps would ultimately make the financial system safer for not only them but for everyone involved ("Money, Power and Wall Street")." JPMorgan was the first to execute this plan when the infamous Exxon crisis took place a few short years back. They decided to take Exxon under their wing and help them out of the crisis but instead of setting aside the capital needed they went and found a company in London to take on the risk of Exxon's loan. This event allowed companies to create more credit and allowed them to give out more and more loans. This marks only the beginning of the downfall to our financial system that occurred in 2008. While JPMorgan was the spark and brains behind the start of our crisis, who is really to blame in this situation? The bankers and regulators who lent out subprime mortgages to the American people are to blame. They knew that certain homeowner's credit and financial stability wasn't up to par for a usual loan. "Sub-prime mortgages were lent out to people...
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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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...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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...Racism is defined as the poor treatment of or violence against people because of their race. In America, images of slavery and the Civil Rights Era would quickly display that racism is a topic from our past. However, the second part of the racism states that it is a belief that some races are better than others. The belief component of racism is still a major factor in our society. Images of these racial beliefs cannot be googled, but the current conditions of minorities are always captured in images of run-down communities and violence. These images create a belief amongst Americans and other nations that minorities (particular African Americans) are low-grade people. Racism shows its face in many areas, but in more of a subtle way. It is so subtle that many may think it does not still exist. Many people would be greatly insulted if they were accused of being a racist. The injustices are so great in number that it becomes a natural way of life for generations of minorities. In comparison, whites have inherited such an entitlement for success that it’s their natural way of living. In a time when we have elected the first African American president, it is obvious that progress has occurred. That indeed is true. Progress does not mean elimination. Racism has not been eliminated from this generation, it just looks different. African Americans may not have to endure slavery or segregation laws, but racial injustices are still a constant. Racism is not a thing of the...
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...What Caused Economic Crisis? Readers Questions: What are the factors that makes today’s economic crisis? Which of them are the most important in today’s economic crisis? Some of the most significant factors in causing today's economic crisis: • A glut of saving from Asia. A glut of savings poured into US and similar countries like UK. This kept US interest rates low and encouraged high levels of consumer spending in US. It encouraged a large current account deficit in the US. It also encouraged an asset bubble, because it was cheap to borrow and this encouraged unsustainable lending. • US interest rates kept too low for too long around 2003-2005. This encouraged an asset bubble, especially in US. The problem was that inflation was low and people felt this was the most important target. In targetting inflation, people ignored the asset bubble. (see: Mistakes of Alan Greenspan) • Bad Loans. Probably the biggest cause of the current credit crisis. Banks and mortgage companies made a serious of bad loans especially for subprime mortgages. Basically, people were lent mortgages they had no realistic chance of repaying. Mortgage companies and banks were left with a series of bad debts they had to write off. (see: Subprime crisis) • Lack of Capital reserves. In the boom years, banks pursued a reckless dash for growth. This meant lending a high % of deposits. Therefore, when they suffered bad losses. They had no reserves to call upon. This led to a dramatic drop in bank loans...
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...The Subprime Mortgage Crisis and What to Do about It A Review of the Literature The fuse for the subprime financial shock was set early in this decade, following the tech-stock bust, September 11th, and the invasions of Afghanistan and Iraq. The subprime mortgage crisis is a historic turning point in our economy and our culture. The disruption in our credit markets is already of historic proportions and will have important economic impacts. More importantly, this crisis has set in motion fundamental societal changes – changes that affect our consumer habits, our values, our confidence to the future, and our psychological status. After this financial crisis, our economic went downturns and worsen now. When we talk about or hear about the subprime mortgage crisis, to fully understand the crisis help us to avoid the crisis happening again in the future. This literature review considers different opinions of the subprime mortgage crisis by responding to the following questions: 1. What are subprime mortgages? 2. How did the subprime mortgage crisis happen? 3. What are the causes of the subprime mortgage crisis? 4. Was the subprime mortgage crisis in the U.S. totally unexpected? 5. What to do to avoid it happening again in the future? By answering these questions, we can have understandings of the subprime mortgage crisis and find out the solutions to the crisis. When Americans taking advantage of the easy credit conditions, we take for granted the problems behind the credit...
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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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...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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...Introduction What provoked the largest financial crisis since the Great Depression? The answers include a diverse array of immediate and deeper causes in the housing and financial sectors of the U.S. economy. While the recessions initial spark was found in housing, U.S. government policy in addition to careless behavior on the part of both lenders and borrowers, along with poor corporate governance can be linked to the massive subprime loans that ultimately turned into the subprime crisis. Self-interest by subprime lenders and Government Sponsored Entities (Fannie Mae) are also liable for escalating the crisis. Among these factors, here I will mainly discuss three principal causes that have come to my attention; the housing price bubble, poor governmental oversee, and the subprime mortgage-lending boom that it fed. The Housing Bubble: From 1980 to 1997 the real price of housing in the United States had remained relatively stable. After controlling for inflation and differences in house size and quality, we still see that the average price of a home in 1997 was only 2% more than the average price one century earlier. This flat trend had ultimately ended beginning in the late 1990’s and early 2000’s. When the housing prices had peaked in 2006, the average price was close to twice the long-term average price from 1980 to 1997. Only six years later did the price return the long-term trend (Shiller Housing Price Index). The origin of the housing bubble is much similar...
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...Who is to blame for the financial crisis? “Too much of a good thing” in my opinion would capture in a few words the financial crisis. But the question you should be asking yourself is whom we can point the finger at? Everybody seems to have a syndrome disorder of the inability to admit his or her wrong and accept blame for the crisis. Therefore for the purpose of this essay I will be discussing who is to blame for the crisis, how global imbalances and the US financial problems played a significant role and how ‘the savings glut’ was crucial. Many people believe that wall street were the spark of the crisis and that greedy bankers relied too heavily on toxic financial products such as sub prime bonds, collateralized debt obligations and other derivatives. But these subprime mortgages with exotic features only accounted for less than 5% of new mortgages in the US from 2000 to 2006. Therefore with this in mind, it is highly doubtful that this was the sole claim to the cause of the crisis. There was a series of events, which triggered the crisis at the start of the decade in 2000 when the Federal Reserve reduced its rate from 6.5% to 1.75% and then to a further 1% in 2001 and in the meanwhile the Federal Reserve dismissing concerns about the employment bubble . As a result of this event it injected the boom into the American economy and between 2003 and 2004 when the Federal Reserve held its rate at 1%. Americans went on a spending binge and created euphoria plus excessive...
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...proximate cause of the crisis in 2008 was the failure or risk of failure at major financial institutions globally, starting with the rescue of investment bank Bear Stearns in March 2008 and the failure of Lehman Brothers in September 2008. Many of these institutions had invested in risky securities that lost much or all of their value when U.S. and European housing bubbles began to deflate during the 2007-2009 period, depending on the country. Further, many institutions had become dependent on short-term (overnight) funding markets subject to disruption.[7][8] The origin of these housing bubbles involves two major factors: 1) Low interest rates in the U.S. and Europe following the 2000-2001 U.S. recession; and 2) Significant growth in savings available 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...
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...The Problems with Foreclosures in the Mortgage Industry I. How are Foreclosures Hurting the Economy? Everyone today is well aware of the issues brought on by the MBS and housing bubble of the late 2000’s and how it has affected the economy. The United States and majority of countries around the world have been brought into a crippling recession from which we are just now working ourselves out of (even though there are those who would argue we are not out of the woods just yet). But not everyone knows how these MBS work or what caused them to bring down the economy or who is to blame. The root of these issues comes from mortgages defaulting, which lowers the amount of cash coming into the MBS. MBS are hedged to cover the risk of default, but when a high enough percentage of mortgages in that particular security default, no amount of hedging can account for the drop in revenue streams. When coupled with the fact that housing prices dropped across the country, these securities were doomed to fail. There is plenty of blame to send around for the MBS crisis; the borrowers for agreeing to loans that they couldn’t keep up with, Loan Officers who put their clients in convoluted programs to make their qualifications get the best loan, Lenders who let these less than credit worthy loans go through their bank and sub sequentially selling them off as MBS, Investment firms who didn’t do their due diligence when compiling these loans into securities, Credit rating agencies...
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