Solving The Subprime Mortgage Crisis

1012 Words Apr 12th, 2016 5 Pages
Introduction:
Subprime represents the borrowers with weak credit history including defaults, bankruptcies etc. The U.S subprime mortgage crisis was a situation where the subprime borrowers started defaulting their loans and sharp reduction in home prices occurred as a result of which the heavy investors in mortgage sector suffered substantial losses. These crises created a global impact and triggered adversity throughout various sectors in the economy.

Events That Lead To Subprime Mortgage Crises (Causes):
Mortgage backed securities:
Previously banks extended credit to the applicants for mortgages and these mortgages were kept in the books of the banks and they were accountable and responsible for any default. Therefore, inorder to alleviate the chances of default, due diligence (inquiry of credit history) was exercised. However, major drawback to banks was that their funds locked up for long time period. Therefore new phenomenon was introduced according to which the originators of mortgage loans could sell that mortgage rapidly in the secondary market in the form of securities. This was also termed as originate to distribute model. For implementing this concept,mortgage backed securities were created through which the mortgage initiator would sell the streams of mortgage loans to the investment banks which would later sell it to the investors and they would receive the interest payments.
Moreover, many credit worthy customers already purchased homes so banks started…
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