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

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

This solutions manual provides the answers to all the review questions and end-of-chapter problems in Financial Management: Principles and Practice, by Timothy Gallagher. The answers and the steps taken to obtain the answers are shown. Readers are reminded that in finance there is often more than one answer to a question or to a problem, depending on one‘s viewpoint and assumptions. One answer is

The housing crisis of the late 2000s rocked the economy and changed the landscape of the real estate business for years to come. Decades of people purchasing houses unfordable houses and properties with lenient loans policies led to a collective housing bubble. When the banking system faltered and the economy wilted, interest rates were raised, mortgages increased, and people lost their jobs amidst the chaos. This all culminated in tens of thousands of American losing their houses to foreclosures and short sales, as they could no longer afford the mortgage payments on their homes. The United States entered a recession and homeownership no longer appeared to be a feasible goal as many questioned whether the country could continue to support a middle-class. Former home owners became renters and in some cases homeless as the American Dream was delayed with no foreseeable return. While the future of the economy looked bleak, conditions gradually improved. American citizens regained their jobs, the United States government bailed out the banking industry, and regulations were put in place to deter such events as the mortgage crash from ever taking place again. The path to homeowner ship has been forever altered, as loans in general are now more difficult to acquire and can be accompanied by a substantial down payment.

Family Finance Co. (FFC), a publicly traded commercial bank, invests in a variety of securities in order to enhance returns greater than interest paid on bank deposits and other liabilities. The primary investments of FFC are collateralized debt obligation, mortgage-backed securities, auction-rate securities, equity securities in nonpublic companies, interest rate swaps, and a fuel swap for gasoline. FFC measures the derivative at fair value, presenting the portion of the fair value change by using the fair value hierarchy. This memo will present the appropriate classification in the fair value

In the hyper competitive world of today’s mega corporations controlled by the sway of the stock market, giant old industrial era companies rule over the automobile market in the United States as well as large parts of the global automobile market. Companies such as General Motors, Chrysler, and Ford were at the center of it until the economic crisis now known as the Great Recession of the late 2000s. The whole market was declining in sales with General Motors and Chrysler taking the biggest hits while Ford only suffered decline comparable to foreign automakers’, Honda and Toyota, levels due to restructuring in prior years. However, the tipping point was edging closer to bankruptcy with General Motors and Chrysler that ultimately

The lessons we should have learned should include the fact that we were warned and paid no attention.

Jules Kroll is planning to enter into the ratings industry. To determine whether it is a good idea and a good time for him to enter into the new business, we project the 5-year NPV for KBRA and apply SWOT analysis to KBRA. The 5-year projected NPV is $341.1 million, a positive number. It is a good time and a good idea for KBRA to enter the business. However, through our SWOT analysis, it would be difficult for KBRA to become competitive in a short time. Thus we suggest it add a credit rating division into the company to make attempts to it but not start up a

Rating agencies also had a strong motivation to compete for market share by catering to their clients. In 2000, Moody’s became an independent, publicly owned firm after being released by its parent company, Dun & Bradstreet. This placed even more pressure on Moody’s managers to increase revenues and improve their shareholder’s returns. (Lawrence, p. 456) From this point on, we begin to see the credit rating agencies drastically underestimate the risks of mortgage-backed securities in a selfish attempt to further their own bottom lines. The birth of structured finance came from new techniques of quantitative analysis used by Wall Street investment banks, and suddenly, Moody’s was not just evaluating corporate, municipal, state and federal government bonds. Structured finance consisted of combining income-producing assets—everything from conventional corporate bonds to credit card debt, home mortgages, franchise payments, and auto loans—into pools and selling shares in the pool to investors. (Lawrence, p. 456)

The risk was extremely high due to the possibility that the loan would never be paid back. During the 2000s a housing price bubble was beginning to form within the United States. This was due to those who before could not own a house, suddenly being able to due to subprime mortgages. Prices rose 90% from 2000 to 2006 (Ueda, 2012) showing a rapid increase in housing prices and therefor increasing the amount further of those who would never be able to pay their mortgage back. This caused great financial pressure within the United States economy when the federal reserve raised interest rates within the United States in February 2007.This meant that debts were not being paid by subprime mortgage holders resulting in the collapse of the subprime mortgage market in mid 2007. A prime example of this is the largest sub prime lender firm within the United States, New Century Financial. New Century Financial filled for bankruptcy on the 2nd of April 2007. The collapse came with a cut of roughly 3,200 jobs. (Treanor, 2007) The collapse of the subprime market meant that the housing boom within United States and United Kingdom came to an end and burst the housing bubble within the United States. (Arestis, Sobreira, and Oreiro, 2010) However, this did not stop the spread of the subprime mortgage. In the United Kingdom, Bank Northern Rock began to target sub-prime customers. Northern

The financial crisis of 2007 was the direct result of housing bubble burst, also known as the United states subprime mortgage crisis. The United States subprime mortgage crisis was a, nationwide banking emergency, occurring between 2007-2010, which contributed to the U.S. recession of December 2007 – June 2009. Subprime lending means, “making loans to people who may have difficulty maintaining the repayment schedule, sometimes reflecting setbacks, such as unemployment, divorce, medical emergencies, etc. (investopedia.com).” Up until 2006, It was easy to have good credit because the credit (money) they obtained came from different countries. As a result, people used this credit to get expensive home loans, and this is what created an economic

In conclusion, we could say it is a good time for Kroll to enter credit rating business since the big three agencies lost considerable investor confidence during the financial crisis, and that the sector is ripe for new blood. However, based on our SWOT analysis, we don’t think it

The housing market crash, which broke out in the United States in 2007, was caused by high risk subprime mortgages. The subprime mortgage crisis resulted in a sudden reduction in money and credit availability from banks and other lending institutions, which was referred to as a “credit crunch.” The “credit crunch” and its effect spread across the United States and further on to other countries across the world. The “credit crunch” caused a collapse in the housing markets, stock markets and major financial institutions across the globe.

Collateralized debt obligations (CDOs) refers to a kind of innovative derivative securities product which simply bundling mortgage debt, bonds, loans and other assets together and then rearranging these assets into different tranches with different credit ratings, interest rate payments, risks, and priority of repayment to meet the needs of different investors. As borrowers began to default, investors in the inferior tranche of the CDOs took the first hit, so the owner of this tranche of CDOs may be riskier. In order to compensate for the higher risk, the subordinate tranche receives higher rate of return while the superior tranche receives lower rate but still nice return. To make the top even safer, the banks ensured it small fee called the credit default swap (CDS). The banks do all of the works so that creating rating agencies will stamp the top tranche since as a safe, triple A rated

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

In relation to the increase in house’s price, the rise of financial agreements such as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) encouraged investors to invest in the U.S housing market (Krugman, 2009). When housing price declined in the U.S, many financial institutions that borrowed and invested in subprime mortgage reported losses. In addition, the fall of housing price resulted in default and foreclosure and that began to exhaust consumer’s wealth and