Contagion And The Subprime Crisis

The beginning of the crisis: From the early to the mid-2000’s, high-risk mortgages became available from lenders who funded mortgages by repackaging them into pools that were sold to investors. New financial products were used to apportion these risks, with private-label mortgage-backed securities providing most of the funding of subprime mortgages. The less

Many factors such as the U.S. Sub-prime mortgage crisis, credit crunch, decline in investments, higher unemployment rates, terror attacks, and the housing bubble caused the great recession of 2007 to 2009. The resulting loss of wealth led to severe cutbacks in consumer spending. This loss, combined with the craziness of the financial market led to the collapse and business investments. As consumer spending and business investments went down massive job loss followed. The largest indicator of economic activity is the real gross domestic indicator (GDP). The recession had a loss of business and consumer confidence. Spending declined and millions of jobs were lost. This resulted in a downward shift in the GDP, and a severe increase in unemployment

This epidemic is the spread of market downside from country to country and is a spill-over effect that is influenced by the agents’ four behaviors which are governments, financial institutions, investors, and borrowers. Financial contagion happens to both advanced economies and developing countries and causes financial volatility. It affects countries capital flows, exchange rates, and stock prices. The contagion contains problems such as irrational phenomena, macroeconomic shocks that cause local shocks passed through competitive devaluations, trade links, and financial

Subprime loans are ethical tools which were wildly misused during the time leading up to the financial crisis in 2008-2009. Subprime lending targeted borrowers who would typically not qualify for standard loans for various reasons. These included low credit scores, low income, and history of late payments. The loans were offered at a rate higher than the market rate due to the increased risks of the borrowers. Many of the clients Countrywide supported were much less likely to be able to pay off their loans compared to traditional borrowers. In the years leading up to the financial crisis, the real estate industry was flourishing which encouraged even clients who could not afford fancy houses to use subprime loans to finance their homes.

When sky-high home prices in the United States turned downward, the entire United States financial sector and financial markets overseas faced its most dangerous crisis since the Great Depression. It all began when mortgage dealers loaned home loans to families that did not qualify for ordinary home loans. The terms of these loans were unfavorable the borrowers. These subprime mortgages may have started with low interest rates

Hence, the subprime mortgage crisis begin when person A cannot pay back the loan because the house he bought is no longer valuable. Indeed, the crisis became global because a lot of Non-U.S institutions also invested in the U.S. subprime mortgage market. And there’s a lot more corporations have relation to those Non-U.S institutions. So when one company, like Lehman, got bankrupted, it affected the whole world, like the domino.

The U.S. subprime mortgage crisis was a nationwide catastrophe that resulted in the increase of the default and foreclosure of home loans, and consequent decrease in the value of mortgage-backed securities. The mortgage crash was a result of non-bank originators being insufficiently regulated and engaging in excessive risk-taking behavior and questionable lending practices. However, the leading causes for the subprime mortgage extend further than flawed lending decisions. The subprime mortgage crisis would not have occurred had it not been for a series of fundamentally flawed government policies (Allen, 2015).

The most popularly known subprime mortgage crisis came into lime light 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. The maximum blame is pointed at the lenders who created such problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default. When Fed flooded the markets with increasing capital liquidity, its intention was not only to lower interest rates but it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At that point of time, lenders found themselves loaded with capital for lending out and higher willingness to undertake higher risks in a surge to get greater investment returns. To overcome of the financial instability and housing price bubbles, Federal Reserve has to intervene to combat these issues.

“Panic was spreading on two of the scariest days ever in financial markets, and the biggest investors were panicking the most. Nobody was sure how much damage it would cause before it ended” (Nocera, 2008, pg. 1). This is what happened as the financial crisis spiraled out of control in 2008 as bankers, investors, and insurance companies realized what they had done. The basic outline of the crisis looks mainly at the mortgage and credit disaster that was caused by the bursting of the “housing bubble”, but the main causes can be traced back to huge developments that shaped the American political economy and its policies within the last 50 years. While we do see this monetary motivation and over confidence as an underlying theme of the mortgage and credit crisis, there are other factors that contributed to the disaster. Some examples are an extremely strong and influential financial sector, lack of regulations from the U.S. government, and the neoliberal shift of the 1970s. While the mortgage securities and credit crises are recognized to be the immediate causes of the financial crisis of 2008, I argue that the strong financial sector and neoliberal shift in the 20th century are ultimately what set the stage for the financial crisis, making it hard for the U.S. to persecute banks and investors for the financial misconduct during this time.

The early beginning of the 21st century had marked the history of the United States (US) with the Subprime mortgage crisis. In fact, it started when the traditional model used by the bank to finance mortgages lending trough customer deposits moved to a new model in which they were selling the mortgages to the bond markets through new kind of investment vehicles . This method made it easier to find borrowers because banks were no more limited by a maximum amount of mortgage lending . The increasing demand fuelled the rise of housing prices, so homeowners tried to take advantage of it by tacking out second mortgage with lower interest rates against their added value . In 2006, the unexpected burst of US housing prices bubble

The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play

Foreign investors starving for fixed income securities that also had returns better than government securities, decided to invest in mortgage back securities provided by Fannie Mae and Freddie Mac. In order to take advantage of the savings glut Wall Street firms began to package many of these sub-prime mortgages together and create what was known as a mortgage backed security.1 A mortgage backed security, was an asset backed security that was secured by a collection of upwards a several hundred mortgages. The issue was the mortgage back securities provided by Fannie, Freddie, and investment banks were given good ratings by rating agencies such as Standard and Poor’s and Moody’s, even though these assets were toxic. They gave the mortgage back securities good ratings, because their risk assessment models solely used previous housing data, and did not include any possibility of a fall in housing prices.3 As a result, overseas investors believed they were getting secure assets with above average returns, but instead they were getting very toxic assets instead. So the interest in these mortgage back securities continued the flood of savings, continuing the suppression of interest rates and maintained the status quo.2 Banks lent out these sub-prime mortgages at a prolific rate because even if the borrower foreclosed, banks were still able to make a profit, as they resold a higher priced house.

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

What role did the Accounting profession play in the recent sub prime mortgage crisis? What could they have done differently?

In 2008, the U.S. economy faced its most dangerous crisis since the great depression in the 1930’s. The contagion, which began in 2007 when inflated home prices deceivably turned downward, spread quickly. The losses included: The investment banking industry, insurance companies, the two major enterprises chartered by the government to facilitate mortgage lending, mortgage lenders and commercial banks. Since most industries rely on credit, the most spectacular troubles broke out in the auto industry as banks stopped making the loans that they need to regulate their cash flow. The Dow Jones Industry Average in the U.S. lost 33.8% of its value and the U.S. financial crisis started to spill into the