This website uses cookies to ensure you have the best experience. Learn more

Subprime Mortgage Crisis Essay

2090 words - 9 pages


Currently the United States is in the midst of the worst global financial crisis of 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 ...view middle of the document...

Mortgage issuers approved loans based on “stated income” or “stated value” rather than borrowers’ actual income or creditworthiness. Credit rating agencies also played a significant role; companies such as Moody’s and Standard and Poor’s were paid by the securities issuers themselves and “AAA” ratings were handed out very easily. In addition, the financial institutions repackaged sub-prime loans into innovative financial instruments, such as collateralized debt obligations (CDOs). There was little regulatory oversight over these new financial instruments, which were usually bought by commercial banks, hedge funds, and European and Asian investors. Also, Former Fed chairman Alan Greenspan’s policy to keep interest rates at around 1% for more than three years starting in 2001 played a significant role in this crisis. As the U.S. economy emerged from the 2001 dotcom burst, Greenspan believed that low interest rates were necessary to keep the economy growing. The problem was that rates stayed too low for too long and financial institutions sought alternative ways to make profits as traditional loans were generating low returns. Investment banks became highly leveraged and market players were content with the booming housing market that offered huge profit opportunities. In addition, financial markets’ appetite for risk was robust under the prevailing belief that the housing market would continue to rise. Following a herding behavior, homeowners saw an opportunity to buy a bigger house at lower mortgage rates, while investments banks saw their competitors making handsome profits through creative financial instruments and wanted to do the same, combined with Greenspan’s core beliefs that markets were self-sufficient and could regulate themselves, the housing market and the economy spiraled down into what is now known biggest financial crisis since the Great Depression.
How is the U.S. current account deficit related to the sub-prime meltdown? Why is the U.S. current account running such a big deficit and is it sustainable?

The inflow of foreign capital reflected the attractiveness of the U.S. economy as a destination for investment. The financial intermediation (driven by global financial deregulation) helped to finance the widening of current account deficits and surpluses around the world. Surpluses were primarily generated in commodity export countries, due to the surge in global commodity prices; East Asian countries, such as China and Korea, who built up their foreign currency reserves to protect themselves against sudden capital outflows following the 1997-1998 Asian financial crisis. Together, they built what Fed Chairman Ben Bernanke called the “global savings glut.” These countries chose to invest their surpluses and become lenders in the global economy. In addition, there has been a reversal in “home bias”, a global phenomenon in which an increasing number of investors choose to invest their domestic savings into foreign assets. This...

Other Papers Like Subprime Mortgage Crisis

What Role Did the Accounting Profession Play in the Recent Subprime Mortgage Crisis?

642 words - 3 pages What role did the accounting profession play in the recent subprime mortgage crisis? What could they have done differently? In all businesses, accounting is the backbone that holds them together. In stating this, the demise of the subprime mortgage industry lies within the bad practices of mortgage companies, banks and financial institutions. Allowing the lending of billions of dollars to non-credit worthy individuals was a disaster waiting to

Banking Regulation Essay

1154 words - 5 pages 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

Subprime Lending

1315 words - 6 pages mortgages. Subprime wrap up The subprime mortgage crisis, popularly known as the “mortgage mess” or “mortgage meltdown,” came to the public’s attention when a steep rise in home foreclosures in 2006 spiraled seemingly out of control in 2007, triggering a national financial crisis that went global within the year. Consumer spending is down, the housing market has plummeted, foreclosure numbers continue to rise and the stock market has been shaken

Reflective Paper

650 words - 3 pages forced many lenders out of business, beginning with the heavily subprime lenders. Abstract Conceptualization During the Interpretation stage (84), The “Perceivers” did not understand the immoral and unethical behavior of the Mortgage Company or their contributions to the Housing Crisis. In fact their predatory practices continue to be reinforced, by Government backed loan and bailouts. I find it rather ironic that investment firms

The Big Short

1325 words - 6 pages allowing the credit default swaps on subprime mortgage bonds, CDO’s, and the eventual collapse of the subprime market. Following the subprime mortgage crisis, the Department of the Treasury released a new regulatory plan, The Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure, which is referred to as “the Paulson Plan.” The Paulson Plan was completed in March 2008 and consisted of a series of short-term and

Mortgage Crisis

517 words - 3 pages The mortgage crisis began in the early 2000’s when homes were increasing in value. Interest rates on mortgages were also low during that time. People thought it was a sure investment to buy a home with the low rates and increasing values. People simply thought the values would never stop going up. During this time people with bad credit could also qualify as subprime borrowers; in addition to this, there was people who also took on high risk

Government vs. Subprime Mortgage

1485 words - 6 pages been 70 years since 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

Lehman Brothers Mortgage Crisis

4012 words - 17 pages and Lehman Brothers 8 D- Measures to mitigate financial crisis 11 E- Conclusion 15 F- References 17   A- Introduction The subprime mortgage crisis happened in the U.S. financial system into the most horrible recession from the time when the Great Depression. This report tracks how the subprime mortgage crisis outspread, disturbing first the housing sector and then the economy on the whole. When banks started lending to subprime

Sub-Prime Mortgage Crisis

1121 words - 5 pages TABLE OF CONTENTS CHAPTERS CHAPTER 1 – Abstract 3 CHAPTER 2 – Introduction 4 CHAPTER 3 – Body Paragraphs 4 CHAPTER 4 – Discussion 5 CHAPTER 5 – Conclusion 8 REFERENCES 8 Sub-Prime Mortgage Crisis: What Went Wrong? Abstract: The crisis of subprime mortgages has become a huge problem in the U.S. financial industry in the last few years and has affected the global financial market too. The smaller mortgage companies

Financial Crisis

682 words - 3 pages announced a salvation package of more than USD 200 Bn. 3. Britain gives more than USD 500 Bn for this financial crisis. Bibliography Amadeo, K. (n.d.). Subprime-Mortgage-Crisis-Cause. Retrieved april 23, 2011, from useconomy.about: research, g. (2008, november 19). Global-Financial-Crisis-2008. Retrieved april 23, 2011, from scribd: shah, a. (2010, december 11). global-financial-crisis. Retrieved april 23, 2011, from globalissues:

How the American Mortgage Crisis Spread to Europe

1727 words - 7 pages in 2004, there were big incentives of expanding the market. The subprime mortgage market in the US became the needle that punctured the housing bubble, which in turn triggered the spread of the crisis to Europe. In this paper I have partially confirmed my thesis by stating that the global dimension of the crisis was a result of the lack of appealing investment opportunities that lead to the ownership of American mortgages by several countries in

Related Essays

Subprime Mortgage Crisis Essay

762 words - 4 pages 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

The Subprime Mortgage Crisis Essay

902 words - 4 pages 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

Subprime Mortgage Crisis And Ethics Essay

1754 words - 8 pages 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

The Subprime Mortgage Crisis And What To Do About It

2837 words - 12 pages 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