Sub Prime Crisis

3926 Words Nov 2nd, 2008 16 Pages
GLOBAL FINANCIAL CRISIS
In the year of 2008, the entire economy is facing up what has been called the worst financial crisis since the Great Depression which is the sub-prime mortgage crisis. This crisis began with the collapse of United States sub-prime mortgage and the reversal of the housing boom. As of March 2007,the value of U.S. subprime mortgages was estimated at $1.3 trillion, with over 7.5 million first-lien subprime mortgages outstanding. Approximately 16% of subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21% and by May 2008 it was 25%. The U.S. mortgage market is
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And the other causes are securitization practices, inaccurate credit ratings, government policies, policies of central bank and financial institutions debt levels. Securitization is structured finance process in which assets, receivables or financial instruments are acquired, pooled together as collateral for the third party investments( Investment banks). There are many parties involved. Due to the securitization, investor appetite for mortgage-backed securities (MBS), and the tendency of rating agencies to assign investment-grade ratings to MBS, loans with a high risk of default could be originated, packaged and the risk readily transferred to others that began in 1970. Now things start to get complicated. Pieces of mortgage-backed securities can be inserted into new investment vehicles, with a remarkable result: investments originally rated as risky can re-emerge rated as safe. This can be done when An investment bank creates a new security from risky slices of multiple securities. In
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