Many investors that purchased the mortgage-backed securities just before the credit crisis believed that they were misled, because these securities were riskier than they were misled, because these securities were riskier than they thought. who is at fault?
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Many investors that purchased the mortgage-backed securities just before the credit crisis believed that they were misled, because these securities were riskier than they were misled, because these securities were riskier than they thought. who is at fault?
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- Analysts and theorists have debated over the different factors that caused the subprime mortgage meltdown. According to your understanding of the crisis, which of the following factors led to the financial crisis? Check all that apply. A. Real estate appraisers and rating agencies were lax B. Credit default swaps clamied to insure CDOs C. The Fed kept interest rates low to encourage home ownership D. investors were fully aware of the risks involved, yet still settled with low returns.Many critics argue that greed in the mortgage markets caused the credit crisis. Yet many market advocates suggest that greed is good, as the thirst for profits by firms that participate in the mortgage markets allows for economic growth. Explain how regulations can allow for greed while also ensuring proper transparency in the mortgage markets so that another credit crisis does not occur.Which of the following hindered the development of a secondary market for mortgages in the early 20th century? Check all that apply. Institutional investors could not assess the default risk of every single mortgage. It was impossible to turn illiquid assets such as real estate into liquid financial instruments. Institutional investors avoided dealing with financial instruments backed by the federal government, such as mortgages. Institutional investors were not interested in small non-standardized financial instruments. Which of the following helped foster the development of a market for collateralized debt obligations (CDOs) and collateralized mortgage obligations (CMOs) in the 2000s? Check all that apply. Inflows of foreign capital Establishment of the Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage Corp (Freddie Mac) Development of mathematical models to price CDOs and CMOs Establishment of the Federal National Mortgage Association (Fannie…
- One example of moral hazard in finance industry is "insurance policies often decreases incentive to take care of possession of its customers". How should people mitigate this problem?During the 2008 recession, large financial institutions including investment and insurance companies, were at risk of bankruptcy due to the sub-prime mortgage crisis. Which element of insurance risk best demonstrates this concept? A. the loss produced by the risk must be definite B. the loss produced by the risk must be measurable C. the loss must not be catastrophic D. the loss must be fortuitous or accidentalThe fallout from the financial crisis of 2008 included an overheated real estate market, fueled by home purchase incentives, poor lending practices, and securitization through high-risk, mortgage-backed securities, which led to a near collapse of global capital markets. As a consequence, many have argued that if the financial institutions had been required to report their loans (and loan-backed investments) at fair value instead of cost, large losses would have been reported earlier. This would have signaled regulators to the problems in the mortgage markets and therefore minimized the losses to U.S. taxpayers. Instructions Explain how reported accounting numbers might affect an individual’s perceptions and actions. Cite two examples.
- Which of the following situations are likely to result in higher loan defaults? Mortgages are held by originating institutions in their portfolios. Borrowers have higher equity in their homes. Lenders who require documentation of income, liabilities and asset ownership. Borrowers with low credit scores.1) What would happen to the standard of living in the United States if people lost faith in our financial markets? Why? 2) How does a profitable capital market help reduce the prices of goods and services? 3) The SEC attempts to protect investors who purchase newly issued securities by requiring issuers to provide relevant financial information to potential investors. The SEC does not provide an opinion on the actual value of the securities.Therefore, a reckless investor could pay too much for some shares and consequently lose a lot. Do you think the SEC should, as part of each new offering of stocks or bonds, give investors an opinion on the appropriate value of the securities being offered? ExplainBefore the financial crisis, mortgage-backed securities were considered to be very safe investments. Later, the underlying risks associated with these securities were fully realized, and they were found to be much riskier than initially thought. What impact does this new information have on the demand for these assets? A. Quantity demand did not change B. Quantity demand declined C. Quantity demand increased
- Most nonfinancial firms would never hold as much of their assets in safe liquid securities as banks do. Why do banks maintain such a high percentage of investment in securities?Why is it important that in an underwriting the investment banker does not overvalue (overprice) or undervalue (underprice) the securities? If the securities are overpriced or underpriced, who suffers the loss?The SEC attempts to protect investors who are purchasing newly issued securities by making sure that the information put out by a company and its investment banks is correct and is not misleading. However, the SEC does not providean opinion about the real value of the securities; hence, an investor might paytoo much for some new stock and consequently lose heavily. Do you think theSEC should, as a part of every new stock or bond offering, render an opinion toinvestors on the proper value of the securities being offered? Explain.
