The Role of Banks: Subprime Mortgages - Research Paper Example

The Role of Banks: Subprime Mortgages Table of Contents CHAPTER I: INTRODUCTION 3 1.1 Background 3 1.2 Problem Statement 3 1.3 Purpose of the Study 4 1.4 Study Hypothesis 4 CHAPTER II: REVIEW OF RELATED LITERATURE 5 CHAPTER III: METHODOLOGY 7 3.1 Research Method 7 3.2 Data Collection 7 3.3 Focus Group Interview 8 3.4 Reliability and Validity 8 3.5 Ethical Consideration 8 CHAPTER IV: FINDINGS 9 CHAPTER V: SUMMARY, CONCLUSION AND RECOMMENDATION 10 Work Cited 11 Subprime Mortgages CHAPTER I: INTRODUCTION 1.1 Background The financial crisis of 2007-08, not only led to the collapse of several banks and financial institutions, but turned down the stock markets in most of the countries. The financial crisis has led to one of the largest banking shakeouts due to the meltdown of loans and savings. The United Bank of Switzerland predicted that global recession was very close and the global economy would require more than two years in order to recover from such shocks (Bernanke “The Global Saving Glut and the U.S. Current Account Deficit”). A few days after this statement, the crisis was on its full swing. Necessary actions were taken to fix the crisis situation, such as huge among of capital was injected in the economy by the government, interest rates were cut down for the borrowers, but the matter went out of hands. The heat of this issue and a series of other trailing events are still prevailing and companies are trying to overcome from the economic catastrophe. In the backdrop of this scenario, this study would be evaluating the facets of subprime crisis and its consequence on organizations in the global marketplace. Identifying the origin of subprime crisis is a significant as well as interesting investigation that would be presented through this study. 1.2 Problem Statement There are various causes which can be evaluated and discussed, while investigating subprime mortgage crisis, but in this study, the focus would be specifically on the housing bubble and banking segment. The problem that would be discussed and scrutinized in this study would be the contribution or role of the banks and financial institutions in the subprime mortgage crisis. 1.3 Purpose of the Study This study will provide significant insight regarding the role of banks and their activities during the crisis. Noteworthy information regarding banks’ role and position in housing bubble and subprime mortgage would be apparent through the research. Highlighting the role of bank would also lead the readers to unveil various other causes of financial crisis that would be obvious after understanding the actual position of banks in global economy. 1.4 Study Hypothesis Hypothesis is the assumption that a researcher makes regarding the direction and result of the study because actually going through all the process of research. This gives the researcher an n idea about the way the research study would turn out to be. In this case, the role of banks would be specifically discussed in case of subprime crisis. Banks do have significant contribution towards liquidity crunch and creation of housing bubble, which finally led to subprime crisis. CHAPTER II: REVIEW OF RELATED LITERATURE Subprime signifies the credit status of the borrowers of subprime loans and does not correspond to the interest rates of such loans. Any type of loans offered to the subprime borrowers which do not satisfy the prime guidelines of a loan are termed as subprime loans. It is a process of lending money to a group of borrowers who are classified as subprime borrowers and they do not qualify for obtaining loans at market interest rates because of the fact that their credit ratings are too low (Duhigg “Pressured to Take More Risk, Fannie Reached Tipping Point”; Labaton “Agency’s ’04 Rule Let Banks Pile up New Debt”). Ideally, the decrease in the price of the commodities in the market results in the augmentation of demand of the commodity. This is what happened in the US economy which resulted in subprime crisis. The mortgages in the country for the home loans were lessened and the citizens obtained the mortgages for constructing their homes (Belka 15). Since most of the Americans wanted to have their own houses, so as a result the demands for loans increased leading to the increase in the rate of bank lending. The mortgage companies found this to be profitable enough and allowed loans to the Americans without proper investigation or scrutiny of their financial credentials. For both the parties it seemed to be a win-win situation. However, the increase in lending rates (interest) led to delinquencies of unpaid mortgagees. These factors had a combined effect on the global economy which initiated with USA. The securities lost their value and the global investors were forced to pull back their investments in order to save themselves from further losses (Barker 3). This was not the end of events, but it gave rise to further qualms in the housing market. The impact of the sub-prime crisis was huge and apart from financial losses, it also took away 9 million jobs. The value of houses in the country fell by around 30 percent, which led to extreme disparities in European and US economies (Balakrishnan “Financial Crisis: Action Taken by Central Banks and Governments”). The money market was badly hit because of critical disparities. The property prices were high, so if the customers failed to pay the loan back, the possession of the house or property was taken and sold to investors for pooling the money, but this bubble busted and the price of the houses fell considerably. Moreover, many borrowers could not pay the loan back, as the bank did not check the authenticity of the borrower before disbursing the loans. So the bad loans accumulated with the bank. The bank had no such provision to sell the property and pool money because the purchasing power of the buyers in the market had reduced considerably and no one was willing to buy property (Baily and Elliott “The US Financial and Economic Crisis: Where Does It Stand and Where Do We Go From Here”). CHAPTER III: METHODOLOGY 3.1 Research Method The research method has been chosen keeping in mind the research problem and the issues which would be included for the study. As the problem statement involves analyzing the role of the banks in the subprime mortgage and crisis, it would be better to conduct the research study by qualitative analysis of data. The qualitative method of data analysis will assist the researcher to deal with complex situations and take the readers through the occurrences that happened because of the negligence of banks or financial institutions. Quantitative method can assist in analyzing statistics and numerical information, but it would not help in deriving any conclusion because it would not aid in identifying the causes (Singh and Bajpai 50-55). 3.2 Data Collection In order to conduct a qualitative analysis in this study, data would be collected through secondary as well as primary sources. The secondary sources of data would be collected through authentic sources like archives, government websites, banks’ websites, journals and other credible sources. The secondary data play significant role in this study because evidences would be required for those events and occurrences which has already taken place and resulted in crisis. However, primary data would be required to gather information related to the perception of the policy makers and economist, who can put forward better insights in this matter (Srivastava and Rego 79-110). 3.3 Focus Group Interview The focus group interview is the appropriate method to collect primary data for this study because simply conducting a questionnaire survey might not reveal the exact point of view or inference of the respondents regarding the subprime crisis and the banks position in this downturn. The sample size chosen for the focus group interview is 5. The respondents would include the scholars or even University professors (economics and finance), policy makers and economist. A set of interview questions would be prepared by the researcher, who would be conducting the discussion and those issues would be discussed to reap information (Singh and Bajpai 50-55). 3.4 Reliability and Validity In order to ensure that the research results are appropriate and recommendation stated is useful, the reliability of the outcome and validity of data need to be guaranteed. Validity is the extent to which the research tool measures what it has to measure. The measurement is said to be highly reliable if it produces a consistent result. Reliability is very different from validity because it measures the consistency, so it is not concerned about the measurement but the consistency of it (Srivastava and Rego 79-110). 3.5 Ethical Consideration Data would be collected through ethical means, which signifies that for collecting secondary data no copyright regulations or policies would be breached. IN case of collecting primary data, the human subjects would be involved because discrimination or biasness would not be done in terms of religion, social status or country (Singh and Bajpai 50-55). CHAPTER IV: FINDINGS This section of the study would include the findings that would be derived after the data has been collected through secondary as well as primary sources. Statistical figures as well as explanations would be included in this section in order to identify the status of banks in subprime mortgage. CHAPTER V: SUMMARY, CONCLUSION AND RECOMMENDATION The problem that has been considered for this study is the role of banks in subprime mortgage crisis. In order to identify the cause and effect of the subprime mortgage crisis, a qualitative analysis of data would be done, which would be collected through secondary as well as primary source. The primary data would be collected through a focus group interview between 5 respondents. This will not only assist in identifying the position of banks and financial institutions during crisis but also help the researcher to identify the learning that banks should take from the prevailing situation. Work Cited Baily, Martin Neil and Douglas J. Elliott. “The US Financial and Economic Crisis: Where Does It Stand and Where Do We Go From Here?” Brookings, June 2009. Web. 23 November 2013. Balakrishnan, Angela. “Financial Crisis: Action Taken by Central Banks and Governments.” The Guardian, 21 October 2008. Web. 23 November 2013. Barker Kate. Review of Housing Supply: Delivering Stability: Securing our Future Housing Needs. Norwich: HM Stationery Office, 2004. Print. Belka, Marek. Germany: 2010 Article IV Consultation-Staff Report. Washington D. C.: International Monetary Fund, 2010. Print. Bernanke, Ben S. “The Global Saving Glut and the U.S. Current Account Deficit.” The Federal Reserve Board, 14 April 2005. Web. 23 November 2013. Duhigg, Charles. “Pressured to Take More Risk, Fannie Reached Tipping Point.” The New York Times, 4 October 2008. Web. 23 November 2013. Krugman, Paul. The Return of Depression Economics and the Crisis of 2008. New York: W. W. Norton, 2009. Print. Labaton, Stephen. “Agency’s ’04 Rule Let Banks Pile up New Debt.” The New York Times, 2 October 2008. Web. 23 November 2013. Singh, Yogesh Kumar and R. B. Bajpai. Research Methodology: Techniques & Trends. New Delhi: APH Publishing, 2008. Print. Srivastava, T. N., and Shailaja Rego. Business Research Methodology. New Delhi: Tata McGraw-Hill Education, 2011. Print. Read More