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2007 Financial Market Crash - Essay Example

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The paper "2007 Financial Market Crash" focuses on the 2007 Financial Market Crash with an aim of understanding in details the policy-making strategies that led to the crash of the economy. Further to that, this paper will explore in details the causes of the crash and the measures employed since then to solve the crash.  …
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2007 Financial Market Crash
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Download file to see previous pages The paper explores the role the Government ought to have played in regulating the banks, the role of the banks in the regulation of mortgages and how they would have accessed the housing bubble thoroughly. In this paper, we have put into consideration four areas to help in understanding the current issues and help us to come up with policy changes (Bates 2012, p234),. It also highlights the resolutions to avoid future market failures or limit the occurrence of the failure. There are several aspects that have been considered in this paper, and they are, mortgage defaults, sub-prime mortgages. In addition, mortgage-backed security and defaults, write off, a wealth effect, moral hazard, and adverse selection. Subprime mortgages that started in the year 1999 played a great role in the fall of the market (Cooper, 2010, p 56). They are mortgages that were offered to consumers who have little earnings or savings as compared to the amount of their savings. The initiative was carried out by Federal Mortgage Association with an aim of ensuring everybody owned a home. However, these mortgages were high-risk loans hence there were hefty terms and conditions attached to them. They accrued high interests and variable payments. The American Government In the year 2002 increased the credit they were giving to the Mortgages Company up to three trillion dollars. The company used to buy the mortgages from the lenders with an aim of making profits when the consumers pay. However, there was a rise in default cases which led to a threat of collapse of the companies. The type of mortgages they offered was referred to as Adjustable-rate mortgages as opposed to the standard Fixed-rate Mortgages. The terms of this type of Mortgage required the borrower to pay a lower amount initially, but the amount payable increased in the subsequent months. Between the years, 1999 to 2005 the mortgages were risk-free since the borrowers would sell their homes with a profit in case they feared the increasing payments on the mortgages (Bates, 2012 p 239).  ...Download file to see next pagesRead More
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