The Subprime Mortgage Crisis - Research Paper Example

Elevated indebtedness and a poor savings culture permeate U.S. financial system, with many residents regularly taking out excess credit for consumption purposes with prompting of lending institutions and the government. This is unlike other developed countries or emerging economies like China who have embodied a savings culture conservatively taking credit or consumption. Within the UK economy, the same noxious culture has persisted despite the progressive prompting by the authorities for more savings (The Economist, 2003). Correspondingly, the housing crisis spread to the UK as defaulting homeowners facing foreclosures increased as large banks faced bankruptcies. The same loose banking practices employed by US banks was evident in most of the lending institutions as they also cashed in on the hedge funds derivatives to generate higher returns. The subprime mortgage crisis was therefore an inevitable outcome after the bursting of the housing bubble (BusinessWeek, 2007). The subprime loans were intricately structured in a layered complex financial model that revolved around many individuals and institutions unlike the traditional ‘prime’ loan that were more conservatively structured. [See Figure: 1] Figure 1: Comparison of Prime and Subprime Mortgage Models Source BBC.Com/Business - 21 November 2007 The subprime mortgage crisis has been traced to the lowering of interest rates from 2001, which generated excessive money circulation hence prompting lending institutions to correspondingly lower their lending rates and requirements. The emergence of mortgage backed securities (MBS) and collateralized debt obligations (CDO) largely derived from the unstable subprime loans was a consequence of the greed of Wall Street financiers and other investors clamouring for the high yield securities (Martin et al, 2008). The collapse of the internet based listed companies, named the Dot com bubble burst in 2001, coupled with the terrorist attacks of 9/11 the same year propelled the regulators to lower the interest rates as evidenced by the Federal Reserve lowering to 1 percent, the lowest level in long time (BusinessWeek, 2007); (Ashbaugh, 2008). With the first signs of the housing crisis meltdown in 2006, the US Federal Reserve adjusted the interest upwards 17 times from 1 percent to 5.25 percent (Watkins, 2008). The growth of the subprime loan sector was exceptionally fuelled by the need for home ownership, deregulation of the financial markets, and the greed of the mortgage brokers and lenders. [See figure 2 below] Figure 2 According to Jacques de Larosière, a former IMF director, the current credit crisis was occasioned by an accrual of various factors, including surplus capital leading to lowered interest rates, of a heightened chase for the high yield risky investments, low risk premiums, occasioned by insufficient comprehension by the stakeholders (Larosière, 2008). U.S. Congressman J. R. Forbes (2008) describes some characteristics of subprime mortgages: Having an Adjustable Rate Mortgage (ARM) whereby the mortgage loan is initially offered at a low interest rate, which is later, adjusted upwards after the ‘introductory period’, usually two years expires. Those having, Negative Amortizing Mortgages (NegAms): these are a set of loans that encourage borrowers to make payments irrationally lower than those due. Conversely, the same unpaid interest amount is loaded to the loan balance for future payments up to a certain level (usually 115 percent). Interest Only Mortgages: type of loans whereby the only payments due monthly are the loan interest while the principal remains unpaid during the introductory period. The amount due nonetheless have to be repaid later at very high rates. Martin et al (2009) attributes the deterioration of the subprime mortgage loans to elevated ’interest rates, low or negative amortization, high broker and origination fees, prepayment penalties, and balloon payment schedules’ (Pg.5). Mortgage brokers enticed these high-risk borrowers with mail ads ‘"Bad Credit? No Problem!" "Zero Percent Down Payment!" (Atlas & Dreier, 2007). A report by the Centre for Community Capitalism at The University of North Carolina (UNC) in 2005 revealed that predatory loan terms enhanced the propensity for mortgage foreclosures in the subprime market lending to ten times the rate experienced in the prime market mortgages. According to the report, ‘prepayment penalties and balloon payments found to hike foreclosure odds by 20 percent and 46’ (Stegman, 2005, p. 1). Many residential properties were thus repossessed as homeowners defaulted on the mortgages while many others fell behind in repayments. [See Figure: 3 on foreclosures below] Figure 3 The Department of Housing and Urban Development (quoted in Stegman, 2005) has referred to mortgage brokers and lenders as ‘predatory’ preying on hapless borrowers. The brokers and their acquaintances including appraisers and other housing or financial agents thus employed the following rapacious techniques: Putting up for sale properties at inflated prices utilising spiced up appraisal valuations to hoodwink eager prospective homeowners. In a similar fraudulent manner, they persuaded borrowers to misinform lending institutions the true status of their financial position in order to secure the mortgage including the funds available for the initial payments. Deliberately loaning out more cash or credit to unqualified borrowers hence seriously exposing them to bad debt using hidden charges or lending terms and outright fraudulent methods hence making the borrowers incur funds they could ill afford to repay. Racially tinged lending tactics that led to higher charges for the minorities especially African-Americans, Hispanics and recent immigrants rather than those based on their individual credit records. Fallacious charges or fees based on for superfluous or fictional goods and services to unsuspecting clients who ended up paying more on already overcharged borrowers. Encouraging prospective homeowners to take elevated high-risk mortgages, including ‘balloon loans, interest only payments, and precipitous pre-payment fines.’ Deliberately targeting susceptible borrowers to refinance their mortgages as way of obtaining credit or cash, whenever the borrowers were in dire need of money for either medical, essentials or other debt related issues occasioned by unemployment and other money problems. Homeowners were therefore deprived of own equity as they took out fresh mortgages on their already inflated homes hence lending them insolvent and striping them of a resale value. Utilising lofty pressurised sales strategies to vend home improvements, selling them later at inflated prices and elevated interest rates Figure 4 The global ramification of the mortgage crisis is exemplified by the instance of the exposure of a Chinese bank, Bank of China Ltd, which had accumulated over $9.7 billion in Wall Street based subprime backed securities by 2007. Similar outlays were held by other international banks like Barclays Plc, Deutsche Bank, Credit Suisse, JP Morgan, and Citigroup among others. The collapsed Lehman Brothers had accumulated over $51.8b in subprime backed toxic securities before its bankruptcy (Atlas and Dreier, 2007). The greed of the banking sector was largely fuelled by the large profit margins accrued by not only the commission earning mortgage brokers, but also the handsomely enumerated bonus earning corporate managers. The most glaringly brazen example is that of the principal lending institution Countrywide Financial director Angelo Mozilo, who made over $270m between 2004 and 2007 in stocks and options, while Merrill-Lynch and Citigroup CEOs were ‘rewarded’ with $48 and $25.6 respectively within the same period in form of stock-sale profits (Krugman, 2009). A FICO (Fair, Isaac and Co.) score is the accepted credit rating used by lending institutions to appraise an individual borrower’s propensity to repay a loan. Those deemed to have poor scores (>620 on a scale from 380 to 850); were traditionally denied access to credit but with the onset of excess money occasioned by the Federal Reserve lowering of interest rates up to 1 percent in 2001. Gradually the risky ‘subprime’ borrowers were availed credit to purchase residential mortgages but with adjustable interest rates or high-risk adjustable rate mortgages (ARMs) (Demyanyk, 2008) and (Forbes, 2008). The price of residential houses shot up fuelled by heavy demand as well as brokers induced purchases from insolvent individuals. [See figure 5 below] Figure 5 Large amounts of personal savings in big banks were imprudently used to purchase MBOs from Wall Street traders enticed by probable higher returns than normal conservative banking services. Hedge funds were invested heavily in the mortgage backed securities by many investment banks as well as other conservative international banks (BusinessWeek, 2007) (Yahoo! Finance, 2007) (Stock-Market-Investors.com, 2008). According to analysis by Chomsisengphet and Pennington-Cross (2006), ‘At its simplest, subprime lending can be described as high-cost lending’ (Pg.31). The authors ascribe the principal difference between a subprime and prime loans as ‘upfront and continuing costs’ whereby the fees for the later are lower while the subprime are substantially higher. The upfront cost include the application and appraisal fees, while the continuing costs encompass insurance fee, principle and interest fee, late payment penalties, and municipal fees. A report by the Mortgage Bankers Association of America (MBAA) indicated that subprime mortgages (14.28 percent) in the 3Q of 2002 generated delinquency rates 51/2 times higher than those by prime mortgages (2.54 percent) do. Predictably, foreclosures rates reflected a similar trend in the same period. Foreclosures for subprime mortgages were recorded at ten times more than prime mortgages at 2.08 to 0.20 percent respectively. This confirmed that subprime mortgages were more likely to fail or default as compared to the prime mortgages (Cecchetti, 2007). Large banks who served as wholesalers purchase the debt, repackage them and trade them to Wall Street firms who sequentially also repackage them as MBS or CDOs selling them to pension funds, hedge funds and institutions (Ashbaugh, 2008). The subprime loans were later secured or securitised by the brokers into highly sought securities after the massed loans were sold to investors seeking high yielding returns at the stock exchange where they were resold to both local and international financiers in a tangle likened to a global pyramid scheme. According to Martin et al (2009), ‘Securitization encompasses brokers and lenders packaging subprime loan debt into mortgage backed securities (MBS) and collateralized debt obligations (CDO),’ (Pg.4). A study by Haughwout et al (2009) disputes the allegation that mortgage lenders and brokers deliberately targeted minority group’s borrowers and neighbourhoods through such inducements during the peak 2004-2006. The study covering 75,000 ARMs found no evidence ‘of adverse pricing by race, ethnicity, or gender in either the initial rate or the reset margin.’ However though the study revealed even better price differentials among the black or Hispanic households and higher unemployment prevalent in these neighbourhoods, mortgage rates with slightly lower rates but the authors fail to ascertain in their study whether these highly disadvantaged poorer residents qualified for even these ‘discounted loans’. The Haughwout et al (2009) study contradict earlier analysis by Mayer and Pence (2007) and Munnell et al 1996) who quoted available data through the Home Mortgage Disclosure Act (HMDA) that signify a pronounced focus by mortgage brokers to indeed target the Black and Hispanic residents for subprime loans. The racial drift has also been extended to the other sectors as evidenced by Charles et al (2008) study of car financing that revealed African-Americans people are likely to be charged higher rates than their contemporaries Caucasians in the same economic category. Similarly, Ravina (2008) revealed that Black borrowers at online lending firm, Prosper.com were charge 1percent more than other racial groups. Martin et al (2008) using a system approach have traced the origins of the subprime mortgage crisis to the 1980s when the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) was enacted. It forestalled regulatory usury upper limits on loans even as interest rates escalated hence allowing lenders to arbitrary charge high interest rates. Similarly, the Alternative Mortgage Transaction Parity Act (AMTPA) of 1982 against state edicts reinforced the financial forbearance that regulated the alternative mortgage market including those with ‘balloon payments, variable rates, and negative amortization.’ These regulations were enacted due to the prevailing tendency of volatile escalating interest rates that reduced fixed interest rates lending. Martin et al therefore indicate that the spiral effects of these deregulations spawned the subprime mortgage market from the 1990s rising to over 20 percent by 2006. Martin et al (2008) ascribe the practice of redlining, neighbourhood control, and blatant prejudice as practised by the Home Owners Loan Corporation and the Federal Housing Authority (FHA) who underwrote private sector mortgages as making it virtually impossible for minorities to obtain prime loans. These in effect pushed them to the unsavoury inner city suburbs where the only option was taking the subprime loans. In a conversely ‘reverse redlining’ development the subprime mortgage brokers targeted these groups to acquire unfavourable ‘sweetened’ loans that ballooned later to unattainable loans hence leading to numerous foreclosures. The brokers utilising asymmetric data duped borrowers to taking up subprime loans even in the instances where they qualified for the more stable prime mortgages (Harvard, 2006). Krugman (2009) alleges the continued operation of the ‘shadow banking system’ which are not accorded the same stringent rules as the mainstream bankers has considerably contributed to the credit crisis mess as evidenced by the mortgage crisis and collapse of many investment banks dealing with loosely secured derivatives and other ambiguous investments. The continued operation of parallel-unregulated ‘banking system’ was allowed unabated despite numerous suspect actions by the investment banks. Regulators have been accused of conniving with the major lending institutions as they laid out a series of complex financial web full of legal entities known as ‘structured investment vehicles’ which tended to mask the exposure of the firm hence making investors experience unwarranted risks (Bloomberg.com, 2006). In the aftermath of the bursting of the ‘housing bubble’, other financial instruments used to propagate insecure investments like derivatives have been highly criticised. These include derivatives used as credit default swaps (CDS) which are employed to hedge against other credit risks. The quantity of the outstanding CDS has been approximated to escalate to US$47 trillion by 2008 (Forbes, 2008). Revered financial guru Warren Buffet had as early as 2003 described them as ‘financial weapons of mass destruction’ (The Economist, 2003); (BBC, 2003). Krugman (2009) alleges that ‘the shadow banking system expanded to rival or even surpass conventional banking in importance’ Pg.14, terming the deficiency in control by regulators as a ‘malign neglect’. A ‘commodity price bubble’ was consequently created including an escalation of oil prices from Impact of the Subprime Mortgage Crisis Burst of Housing Bubble Apart the immediate impact of homeowners forced out in the street due to foreclosures, the prices of houses plummeted as many residential properties came up for sale. Those retaining their homes found that the value of their holdings had drastically reduced in the face of low demand for houses. These made refinancing difficult while the interest rates kept on appreciating. This resulted in the bursting of the housing bubble artificially created by various forces in the industry that rendered many families destitute and homeless especially the racial minorities of Black and Latino racial groups. Housing prices went down dramatically by over 20 percent from the peak level in 2006 as the housing sector registered a glut of residential house for sale after foreclosure and poor sales (Baily and Elliot, 2009); (Bernanke, 2008). [See figure 6 below]. Figure 6 Global Credit Squeeze The consequent freezing of funds by lenders to conserve their funds led to a massive credit squeeze due to lack of interbank lending as well as minimal lending to individuals and institutions. Many banks that relied on interbank lending were particularly exposed including UKs Northern Rock, which was eventually bailed out by the government through nationalisation (HM Treasury, 2007). Many banks eventually received bail out cash from their governments as the credit squeeze intensified including large banks like Citigroup, Morgan Stanley, Countrywide Financial, HBOS, JP Morgan, and HSBC among others. Other financial institutions collapsed including large conglomerates like Bear Stearns, Lehman Brothers, and Washington Mutual among others (Altman, 2009). International Collapse of Banking Sector On a national scale, the most affected country was Iceland, which was largely reliant on the financial institutions to propel growth. The country had strategically positioned itself as banking haven with attractive banking terms. The international collapse of the credit system paralysed the country, which had to borrow funds from IMF and World Bank. In the UK, London had emerged as the world’s financial centre suffered heavily due to the collapse of the various financial institutions. In the US, the world’s largest insurer AIG had to seek a massive injection of funds from the government to keep afloat due to its exposure through underwriting subprime mortgages. The losses as result of the MBOs and CDOs or toxic assets in the US were conservatively put at $1 trillion while the loss in EU countries was estimated at $1.6 trillion with the IMF indicating the exposure by US banks was at 60 percent while those of UK banks at 40 percent (Reuters, 2009). Figure 7: Global Bank Losses - 2008 Government Bailouts The existence of a shadowy banking system mostly controlled by investment banks exposed national economies to highly risky manoeuvres. The total assets held by the five main investment banks by 2007 was four trillion while the combined total of the five mainstream banks was six trillion in the US as compared to the total assets from all banks at ten trillion (Cecchetti, 2007). The collapse of these banks affected a third of US economy hence the government had to chirp in injecting over $13.9 trillion, with a total $6.8 trillion injected to the economy by June 2009 after the enactment of the Emergency Economic Stabilization Act or Troubled Asset Relief Program (TARP) between 2008 and 2009 (FDIC, 2009). Escalation of Global Commodity Prices The rise in oil prices that almost tripled in 2008 escalated the now global financial crisis as oil prices rose from $49 dollars per barrel to $140 dollars. Consumers were hard hit as most households reduced their consumption patterns as many companies collapsed laying-off large swathes of staff. The most affected initially were airlines, which experienced lowered passengers travellers internationally as well as nationally. This led to many employees been laid off including large airlines like British Airlines, Pan Am, and Lufthansa as others collapsed entirely. Another sector heavily affected was the automotive industry as consumers reduced spending on new vehicles. Large global car manufacturers like General Motors, Toyota, Nissan, and Opel were hard hit registering losses and borrowing heavily from public coffers. Collapse of the Bond Market The collapse of the subprime mortgage sector precipitated the collapse of the global mortgage bond market, which had been one of the most vibrant economic sectors within the financial industry. When the Wall Street and other global investors panicked in the face of many non-performing mortgages and foreclosures, there was rush to dispose of the toxic bonds which propelled the larger decline in the other market segments consequently including stocks of the main bond holders. In this regard, all other mortgage bonds become unpopular as the glut set in the market. [See Figure: 8 below] Figure 8 International Economic Decline Internationally the recession emanating from the US was immense as most countries relied on US led consumer markets, which accounted for a third of all global consumption. In the Middle East, the countries lost over three trillion dollars as a direct lost of the credit crisis. GDPs in many countries contracted heavily with the UK registering a 7.4 percent decline, Germany at 14.4 percent, Japan at 15.2 percent and Mexico at 21.5 percent. The US unemployment rate doubled from its pre-crisis rate to stand at 10.2 percent by October 2009 (Businessweek, 2009). In Europe among the EU countries, the UK has been the most affected with the economy contracting noticeably 0.3 percent. [See Figure: 7]The UK government has therefore reduced its base interest rate from 4.5 to 3 percent while the European central bank has similarly lowered its rate from 3.75 to 3.25 percent in a bid to expand money supply (Baily and Elliot, 2009). Figure 9 Analysis of Measures Undertaken to Stem the Subprime Crisis The immediate macroeconomic measure undertaken by various governments to stem the credit crisis was to lower the base lending rate or interest rate of their central banks to encourage liquidity in the markets, which had frozen as market jitters, set in paralyzing the economy. In the US, the Federal funds rate was lowered from 5.25 percent to 2 percent, and the discount rate from 5.75 percent to 2.25 percent (Federal Reserve Bank, 2008). This measure though customary for such situations has converse effect of increasing lending by the commercial banks hence consequently encouraging irresponsible credit advance to consumers thus prompting inflationary trends in the economy. The large-scale injection of public funds through bailouts to the financial institutions and iconic big companies like General Motors, AIG, among others, has been heavily criticised by conservative capitalists who prefer the financial system to realign itself. Weiner (2007) and Brown (2008) have castigated the heavy government bailout, calling it a ‘moral hazard’ that will end up encouraging even more excesses in future. Samson (2008) has asserted that the government action creates a large unnecessary national debt while letting the borrowers escape. This ironically was the case during similar government bailout or ‘thrifts’ of the banking sector in the 1980s during savings and loan crisis, which may have encouraged the banking sector to be irresponsible (England, 1993). However, Martin and Watt (2008) call for more effective fiscal and legislative rules and guidelines that can avert future financial crisis rather than blaming the victims for their calamities. In the US, the 2007 Federal Housing Assistance (FHA) program has assisted homeowners to refinance their mortgages avoiding foreclosures. Similarly, the Federal Housing Finance Regulatory Reform Act has been enacted with an objective of more proactive government financing of home ownership. This measure will have a dual role of immediate relief to those facing foreclosures and prospective homeowners, but conversely will in the long-term impact negatively on the mortgage business for the private equity firms. The latter may be driven out of business, as most prospective borrowers will opt for the softer credit from the federally funded programs. The presumption of big banks that the government cannot allow them to collapse, as they were ‘too big to fail’ has made them reckless in their actions. McCool (2000) had postulated that in 1998, the New York Federal Reserve Bank liberation of Long-Term Capital Management would encourage the larger banks to acts of irresponsibility. Mainstream commercial banks which had entered the fray by transferring their chattels and liabilities from the balance sheet through ‘special purpose vehicles’ and other derivatives into the shadow banking system are now required to reconvert these hedge funds back in their books, hence reduce their capital ratios. These funds are estimated to range from $500 billion to over $1 trillion (Wolf, 2009). The US Federal Reserve, the European Central Bank, procured own and private debt obligations from the commercial banks valued at over US $2.5 trillion. Congressman Forbes (2008) proposes an enhancement of government-sponsored schemes like Fannie Mae and Freddie Mac to assist in home ownership. He also supports the enactment of a temporary relief of the tax provision, which taxes credit as income hence aggravating the debt burden of borrowers. The Emergency Economic Stabilization Act of 2008 (EESA) in form of the Troubled Assets Relief Program (TARP) has initiated a lending of over $700 billion funding to diverse financial sectors of the economy. In the UK, Northern Rock nationalisation cost taxpayers £87 billion. However, the bailouts and other government assistance measures have not been overly successful and even the U.S. FDIC admitted by December 2008 that over 50 percent of those in their programs had lapsed again. Almost 40 percent of borrowers fail and become delinquent within eight months of entering the programs hence failing to fend off foreclosures (Christie, 2008). Economists Roubini and Zandi (2009) have advocated for mortgage lender banks to be compelled to lower the principal balances owed by 30 percent to alleviate the debt burden rather than government assisted bailouts since the loans were highly inflated (Forbes.com, 2009). Berger (2007) has described the government assistance programs or bailouts ‘nothing less than a wealth transfer to those who made ill-advised credit decisions from creditworthy, fiscally responsible taxpayers’. However, the inability of the mainstream commercial banks to provide the credit gap left by the shadow banking system had left many economies terribly exposed hence the bailouts. Recommendations I. There is an urgent need to establish mechanisms that distinguish genuine subprime bankers from the predatory ones preying on hapless individuals to attain gratuitous profits. The failure by the regulatory authorities to stem the tide of unsavoury lending institutions even after early warnings by established financial analysts like Warren Buffet is almost criminal. The Mortgage Reform and Anti-Predatory Lending Act of 2007 is positive step towards enhancing regulatory rules and forestalling predatory tendencies by mortgage brokers and loaning institutions that have brought about the current crisis. The regulation will ensure that private mortgage companies and mortgage brokers are regulated by the federal authorities rather than relying on inefficient municipal or state governments. II. The arbitrary actions of the lending institutions should also be halted starting with those facing foreclosures by scrutinising the mortgage agreements, which can discern whether they were victims of fraudulent brokers and lenders. Similarly, those subprime lenders still practising must have their requirements reassessed to remove those clauses that lead ballooning loans, misleading introductory periods and other sweetened sections that entice unsuspecting gullible prospective homeowners into potentially financial cul-de-sacs. Other fraudulent methods like inflating housing prices, false appraisals, and phony income statements must be regulated against and aptly enforced by the federal and municipal authorities. III. Private lenders should be forced to make full disclosures to their clients as well as educate them on the different aspects of the loan to be engaged. The Homeownership Preservation and Protection Act of 2007 ensures that investors in the MBOs and CDOs are made liable for dishonest acts of mortgage brokers and bankers, hence allowing the aggrieved mortgagee facing foreclosure to seek redress from the current mortgage holder. In view of the fact that non-profit institutions like the federally backed Neighbourhood Housing Services of America (NHS), has successfully engaged the volatile subprime mortgage market with minimum foreclosures and default rate among the ‘risky’ low income groups indicates that the private lenders and brokers consistently engage in malfeasance activities to the detriment of their customers and general public. The delinquency rate at NHS of 3.34 percent is well below the national average of 14.5 percent prevalent within the private lending institutions (Atlas and Dreier, 2007). Krugman (2009) has called for those financial institutions operating like banks are likewise are as closely monitored as the mainstream banks to reduce the incidences of illegal activities. IV. The Federal Reserve Bank chief Ben Bernanke has proposed for a new resolution to close down financial institutions experiencing liquidity problems, especially in the shadowy banking system includes many investment banks and hedge funds sectors (Bernanke, 2008). This recommendation yet to be enacted is very welcome to ensure these financial institutions cease their risky manoeuvres hence saving the public from been enticed to investing in them or depositing funds there. V. The large bonuses and stock options enjoyed by the directors of these financial institutions should be discontinued to be at par with other highly performing deserving employees. The issue of superior remuneration to the directors even in face of declining fortunes of an organisation reveal the extent of their greed which is also translated into issuing fraudulent accounting statements that mislead the unsuspecting investing public as evidenced in the WorldCom, Enron and former NASDAQ chairman Maddoff who for many years fleeced investors billions of funds. The stringent Glass-Steagall Act of 1933 repealed by the 1999 the Gramm-Leach-Bliley Act should be re-enacted to forestall errant financiers. VI. Large corporate multinationals like AIG or Microsoft should be forced to breakdown into manageable segments or divisions of smaller companies to reduce the impact of any financial downturn as well as ensuring that incidences of malpractices, particularly accounting, are more easily monitored or regulated by the authorities. VII. In the subprime mortgage loans, a new rule as advocated by Warren Buffet requiring a minimum cash outlay before a loan is granted like the prime mortgage should be enacted and enforced. Buffet proposed a 10 percent rule but this should be raised to at least 15-20 percent (Buffet, 2008). This would ensure that those taking loans are not mere speculators as previously evident with individuals taking up mortgages in anticipation of selling them off again or refinancing hence exposing them to dishonest brokers who inflate house prices making them unable to reinvest in them. Similarly, the homeowners will be cushioned against the monthly payments, which will be substantially reduced. VIII. Financial institutions must be clearly insured against any future market meltdowns. This can be in form of enhanced minimum capital requirements deposits maintained at the country’s central banks. Larger banks must have a correspondingly higher minimum deposit as proposed by former Federal Reserve Bank Chairman Alan Greenspan who advocated for a graduated regulatory capital. Thus, the contingent capital should be henceforth computed according to their bank deposits (Financial Times, 2008). Conclusion In the aftermath of the global economic crisis occasioned by the collapse of the subprime mortgage sector which had a domino effect on world economies, the regulatory authorities have come under severe criticisms for allowing the continued unregulated operation of the greedy shadow banking system. The greed of Wall Street investors and the malpractices predominant in the mortgage sector should have been more closely monitored. The fact that one small corners of the world affects the completely global economy to cataclysmic effects must induce the authorities to be more diligent in regulating wayward charlatan institutions and individuals. Governments everywhere must ensure the revision of accounting rules as proposed by various analysts including both the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are commendable since they will enhance compliance hence reduce incidences of malpractices. This may reduce a repeat of the current financial crisis recurring due to financial improprieties in future. The need for owning your own shelter or abode has always been a fundamental basic human instinct that is essential and immemorial. To facilitate this need, governments must guard the exploitation of the public by predatory opportunistic individuals by facilitating or taking over the provision of housing from the private shelter as evident in some countries like China and Israel. In the US, the government sponsored like Fannie Mae and Freddie Mac banks can be further strengthened to take over from the profit seeking private enterprises. The operations of the shadowy secondary security market must also be scrutinised with an aim at heavily regulating the sector due to the huge sums involved in the intricate though ambivalent and sometimes illusionary financial web that has suckered in almost all the diverse international investment markets hence still a lingering lethal cloud that overhangs all the global world economies. References Altman, R C (2009) Altman - The Great Crash. Retrieved December 15, 2009, from Foreignaffairs.org: Haughwout, Andrew C M (2009) Subprime Mortgage Pricing: The Impact of Race, Ethnicity, and Gender on the Cost of Borrowing. Washington DC: Federal Reserve Bank of New York Staff Reports No. 368: JEL classification: G21, D40. Ashbaugh, M (2008) The Subprime Mortgage Crisis Explained. Retrieved December 15, 2009, from Stock-market-investors.com: BBC.com (2003) Buffet Warns on Investment Time Bomb. Retrieved December 15, 2009, from BBC Online: Berger, S. (2007). 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Due to lack of adequate empirical ‘evidence’, the study was not fully backed by experiential data. In the allegation of racial and social bias employed by the mortgage brokers and lenders, were contradictory submissions from the sources hence making veritable conclusions difficult. The scope of the report required an analysis of the countermeasures undertaken by the governments’ regulatory arms as well as those used by the industry to realign themselves from the credit crisis ensued. However, due to the limited period since the crash of the subprime market, an analysis of the effectiveness of the various schemes including fiscal and monetary macroeconomic programs has been hypothetical. The large-scale bailouts by the government have also been analysed but their real effectiveness can only be ascertained in the long run. Another limitation was the lack of adequate data from other countries and regions impacted by the subprime mortgage crisis including Asia, Africa and South America. Most of the data mainly emanated from US and European regions hence not giving a complete global picture of the impact of crisis in other regions. Read More