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Financial Crisis, Home Mortgages, Financial Institutions and Adverse Selection - Case Study Example

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The paper "Financial Crisis, Home Mortgages, Financial Institutions and Adverse Selection" describes that financial crisis that has currently occur in different parts of the world has highlighted limitations of financial innovation. The cause of the financial crisis is the financial instruments that are used in the economies. …
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Financial Crisis, Home Mortgages, Financial Institutions and Adverse Selection
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Download file to see previous pages The obvious association between the two comes from the fact that the mortgage market contraction, which in many countries evolved into a recession in 2008-2009, was led by intensive use of certain complicated financial instruments such as CDOs and CDSs in the United States and other countries.
It should be recognized that virtually any financial product holds dangers and can be improperly used. Potential problems are likely to increase the complexity of the instruments, the insufficiency of information conveyed by sellers, and the lack of due diligence on the part of investors (Carey, 2009). The huge mortgage securitization of current years seemingly had poor performance in the areas. Mortgage securitization in the successful years did not bring any help to reduce the problems that occurred in information that are characteristic of credit transactions. Appropriate risk assessment did not induce the same characteristics. Role of securitization in mortgage lending
The roles of securitization in mortgage include barking up securities, collateralized debt obligation and structure invested vehicles (Barger, 2008). In today’s setting, one that gets a loan is likely to sell the loan to a third party which can be government agencies, an institution in the private sector or government-sponsored entities. The mortgage is then sold with payment rights to the investors. The process can be long as the mortgage can be sold to several other people. The process is what is referred to as securitization. The main role that is played by the process is a conversion of mortgages to mortgage-backed up securities. In mortgage backed up securities, the payments that are made are based on collection from individual mortgages.Mortgage-backed securities were supposed to be sound investments as they were rated by genuine rating agencies. The securities, however, did not happen as planned and the hazard led to the crisis.  ...Download file to see next pagesRead More
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