The Recession Of The United States ( Us ) With The Subprime Mortgage Crisis

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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
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New lending strategies involving structured finance and securitization contributed widely to the meltdown of Subprime mortgages market. Under this system, banks were able to make mortgage loans that were pooled together as a mortgage-backed security (MBSs) and, then, sold into securities to investors . Moreover, in some more complex securitization, namely the collateralized debt obligation (CDOs), the mortgage originators were sold to a single purpose company acting as a special purpose vehicle (SPV), who combined them with other debt instrument that were issued by special investment vehicle (SIVs).
After the creation of this structured product, the SPV was entitled in the interest from the pool of bank loans. However, since the SPV’s shares are held by someone else that the originator, the SPV incomes doesn’t appear as part of the bank consolidate account . Thus, to repay the bank originators, SPV divided the cash flows from CDOs or MBSs securities into segments, called tranches, with different repayment and return conditions according to investors’ appetite for risk . As it will be in the next section, the CRAs have played an important role in the favourable rating of these segments.

The main role of CRAs are to reduce the information asymmetries about the financial markets by providing independent ratings based on an
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