U.s sub prime crisis essay

Household debt relative to disposable income and GDP. In the second paper Kenneth Dam does an international comparison of the weaknesses in the financial regulation which led to the subprime mortgage crisis.

But why did such financial crisis take place? However, the leading causes for the subprime mortgage extend further than flawed lending decisions. Lenders were able to make above-market returns by originating and securitizing mortgages and increased subprime loans in order to boost revenue, however, this led to a decline in standard of mortgages that were included in the collateralized mortgage obligations CMOsKregel, Basel 3 is being rolled out with stiffer capital requirements, rating agencies are revising their investment grades models and governments and the public is yet to forgive the financial institutions for downturns in GDP and economic activity which was caused by financing of rescue packages2.

The boom in the US housing market bycoupled with lax regulations and favourable market conditions such as low interest rates, created an opportunity for banks to raise more revenue as they could lend at subprime rates and sell off the loans through securitization.

As the downturns in the housing market amplified, rating agencies of banks and other issuers were downgraded, which added to decline in solvency and liquidity of banks as more and more borrowers defaulted Bessis, Investors began borrow even more just so they could buy more homes to use for as assets in future investments.

subprime mortgage crisis essay

Most financial crisis related investigations focused on mortgage backed securities that banks sold consisted of subprime mortgages that are doomed to be defaulted. The major concern amongst most regulators inarguably became the cause of the crisis and how they can be prevented from reoccurring.

U.s sub prime crisis essay

Bessis also alludes that as a result of securitization, risks of toxic assets were disseminated to the entire industry and to all other players in the market who were oblivious to their risk exposures. S and Tavakoli, M.

Kregel surfaces 3 imbalances namely; wealth and income, current account and financial sector imbalance, as causes to the global crisis by allowing innovations which dispersed and magnified risk for the entire financial system. The only remaining questions for the investors concerned their outlook on interest rates and their preferences on maturities. Kregel also notes that the fall in demand of the CMOs led to further fall in prices which then spread to European investors in these securities and rapid rise in interest rates as counterparties in short-term money markets were no longer assumed to be credit worthy. The term subprime mortgage refers to the many home loans taken out during a housing bubble occurring on the US coast, from Should minorities be blamed for recklessly accepting loans and defaulting on them after realizing they could not meet their obligation The financial crisis that has engulfed the world is really a disaster, leading to precipitous shrinkage of human wealth and instantaneous evaporation of long-time efforts by financial institutions. Banks operate in competitive markets and continuously look for ways to remain profitable. It is common that banks create value by maximizing returns relative to cost of capital. As time went by other qualification guidelines weakened and gave easier access to mortgages.

P Morgan. International Market Correlation and Volatility.

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The Cause and Effect of the Subprime Mortgage Crisis