This paper talks about mortgage backed securities (MBS), that refers to debt responsibility that stands for claims to the cash flows from pools of mortgage loans, most commonly on residential property. Also the role of MBS in the surfacing and explosion of the economic crisis of 2008 is being examined…
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This will normally lead to a fall in the countries’ GDP, a rising and falling of prices because of inflation and deflation and a drying up of liquidity. It normally can take a form of recession or a depression. The economic crisis began with bursting of the united states housing bubble and high default rates on subprime adjustable rate mortgages (ARM),and variable rate mortgages beginning around 2005 to 2006(Wall Street Journal, December 4, 2007). Prior to the crisis, the government policies and competitive pressures encouraged high risk lending practices for several years. The role of Mortgage Backed Securities in the economic crisis The financial crisis was highly felt in the market in 2008. The civil fraud charges was filed against several major credit rating agencies for their role in developing mortgage bond that helped bring about the financial crisis in 2008. The Wall Street Journal reported that the U.S. Securities Exchange Commission (SEC) is currently looking at the role these companies played in the crisis and exploring the possibility of holding them accountable. The crisis began to affect the financial sector in February 2007, when HSBC, the world's largest (2008) bank, wrote down its holdings of subprime-related MBS by $10.5 billion, the first major subprime related loss to be reported. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. Top management has not escaped unscathed, as the CEOs of Merrill Lynch and Citigroup resigned within a week of each other. As the crisis deepened, more and more financial firms either merged, or announced that they were negotiating seeking merger partners. (Wall Street Journal. Online, May 2008). Credit risk arises because the borrower has the option of defaulting...
This paper outlines the role of the mortgage backed securities (MBS) in the surfacing of financial crisis
Mortgage backed securities are loans that are normally purchased from mortgage companies, banks and originators and then assembled into groups by a private entity, a governmental or a quasi governmental. The securities are then offered by the entity. These securities are offered through the securitization, that represents the claims on the principal and interest payments made by borrowers on their loans in the group.
Most of the mortgages are offered by a U.S. Government agency known as the National Mortgage Association or government-sponsored agencies which comprises of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association
Mortgage bonds or mortgage-backed securities were secured by a mortgage on one or more assets. They are generally backed by real property or real estate holdings. The mortgage bondholder has a claim to the underlying property and can sell it off to compensate for the default if the homeowner paying their mortgage defaults.
Economic crisis refer to a situation where the economy of a nation or a country undergoes a sudden downturn which is brought about by financial crisis.
The financial crisis was highly felt in the market in 2008 The civil fraud charges was filed against several major credit rating agencies
Credit risk arises because borrower has the option of defaulting on the loan one owes. In the real sense, lender is the one who bore the credit risk on the mortgages issued. It was made possible for lenders to sell the right to receive the payments on mortgages they issue through securitization. This led to several risks in the financial sector
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CDS – Credit Default Swaps 6 5. Why economic models failed? 8 6. Case Reference – Perspective of HSBC Bank 8 7. Conclusion 9 8. References 11 1. Introduction Financial institutions cater to the needs of different types of customers by providing relevant financial services.
The Possible Contributors to the Great Recession in relation with Mortgage Lending Practices
The global economy of the world is well-aware of the Great Recession of 2009 which was one of the massive declines in the history of economic recessions. It initiated at the start of the year 2007, prevailing severely through the year 2007 and affecting the economies of Europe along with other continents by the end of the year 2009.
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In particular, the paper focuses on how the FED used three key tools of monetary policies during the time of economic crisis. These tools include open market operations, setting the reserve requirements and discount rate. As it is shown in the paper, the monetary policy of the Fed proved to be effective in correcting a financial crisis,
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The current credit crisis which is the wave of the collapse of the US sub-prime mortgage market can be evaluated by understanding the history which is associated with it in terms of the effects it has had on the borrower as well as the financial statements of the banks,other financial institutions and the investors in the mortgage backed by securities around the world
The main aim of establishing Fannie Mae was to give local banks money to finance home ownership. This was done in order to encourage and therefore increase owning of homes and to avail affordable housing.
During its initial stages Fannie Mae’s
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There was a reflection that realization that bursts the United States housing and credit bubbles would contain unpredicted losses for asset based financial assets. In between the third quarter of 2007 and the
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