Sub Prime Crisis

Topics: Subprime mortgage crisis, Subprime lending, Mortgage Pages: 7 (2600 words) Published: March 21, 2013
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Sub prime crisis

Discuss the cause of the Sub-Prime crisis and the parties responsible for causing such a crisis.

There were different complex factors that may have contributed to the Sub-prime crisis during 2008-2009. They were easily associated with the investment banks and government sponsored enterprise, such as Fannie Mae, on how to have dealt with their liquidity issues and Subprime mortgage loans that got them back-fired. One of the largest contributors to the expansion of the high-risk-loans was Fannie Mae and Freddie Mac. When majority of the banks first started off with low credit interest and easy conditions loans, property was seen as an appreciating asset. Banks offered adjustable-rate-mortgage (ARMs) and Subprime loans to all kind of people with good or bad credits scores as they wanted higher revenue when they resell the bundled subprime mortgages called the Collateralized debt obligations (CDOs) and Mortgages-backed securities (MBS) to the other Investors around the world. The subprime crisis had shaken Northern Rock bank so badly that they had a hard time seeking help to keep the business going. The British banks Lloyds TSB group Plc had bought over HBOS Plc whom is the largest mortgage loans lenders. Bradford & Bingley took control over by UK Government while their branches were taken over by Spain’s Santander. Germany struggled to save Hypo Real Estate while Nomura Holdings Inc was being bought over by Lehman’s franchise in many countries such as Europe, Asia Pac, Japan and Australia. The Crisis caused shockwaves and sent panic to the other neighbouring countries causing shares to drop sharply over a short period of time. Commercial Banks, investment banks, investors and people suffered great losses resulting in certain foreclosure or even bankruptcy. Large amount of loan was also taken from hedge funds to assist banks that are falling apart. When banks fell from its former glory, tons of people lost their jobs and banks became more cautions when dealing with any loans to business, properties or even to other banks. Traditionally, banks would go deep into analysing every single loan applicant, from their credit scores, to their employment details, net disposable income and even to check their ability to pay off their mortgage loans before financing the applicant with sufficient funds to purchase their desirable property. Thorough checks had to be done before granting them with the loans as some of the applicants that came forward may have high probabilities of defaulting their loan or would leave for other competitions for loan which would eventually cause a property downturn in the market. These methods were often the safest choice but banks were restricted to their growth. The traditional methods were soon discarded by the newer generations. Hence, the newer generation were willing to take higher risk loans for higher revenues. Assuming that prices for property continue to appreciate, they would be enjoying higher profits thus willingly offered larger amount of loans at low interest rates to the borrowers. Before subprime mortgage was implemented, prime mortgages were sold to banks investors which they would bundle them up as CDOs and sell it to outside investors after securitising it....
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