The Subprime Crisis and Its Impact in the Financial Sector
Ballesteros, Ted
Maducdoc, Gervi
Valdecañas, Francesco Adel
Yau, Matthew
MFIMET2 K31
Topic: The impact of the subprime mortgage crisis on the financial sector of US.
INTRODUCTION
I. Background of the study
The Sub Prime Mortgage Crisis maimed the US Economy as house prices were inflating exponentially; a bubble in financial terms. This eventually burst and causing the assets tied to the different real estates to shrink and devaluate. A financial crisis as such had been one of the most alarming circumstances that hit the United Stated and all of its stakeholders. The said tragedy impinged all bouts of growth and development from such fast growing economy to a stagnant crawl to recovery.
The Sub Prime Mortgage Crisis was basically a result of unregulated and mispriced credit default swaps. These are debt instruments used to insure the debt of an entity against default. The mispricing was caused by the lack of projection for credit risks that are above the line such as systematic risks. As these instruments were engineered to compensate for the certain risk using historical data analyses, the “soft” information was not accounted for. When the economy recovered and payments on their mortgage loans shoot up, they had no choice but to default on their loans. Also, with the growth of the housing sector, people were buying houses that they cannot afford seeing the possibility that house prices will continue to rise. As the homeowners witnessed the prices of their houses decrease when the housing price bubble burst, they foreclosed, and as the value of selling their houses were less than their mortgages. This alarmed the banks as they bought mortgage-backed securities resulting them to be afraid of lending to each other because they did not want these toxic loans as collateral. This also added up to the woes of the economy.
II. Statement of the problem
Given the subprime mortgage crisis caused a rapid inflation and devaluation of house pricing and
Maducdoc, Gervi
Valdecañas, Francesco Adel
Yau, Matthew
MFIMET2 K31
Topic: The impact of the subprime mortgage crisis on the financial sector of US.
INTRODUCTION
I. Background of the study
The Sub Prime Mortgage Crisis maimed the US Economy as house prices were inflating exponentially; a bubble in financial terms. This eventually burst and causing the assets tied to the different real estates to shrink and devaluate. A financial crisis as such had been one of the most alarming circumstances that hit the United Stated and all of its stakeholders. The said tragedy impinged all bouts of growth and development from such fast growing economy to a stagnant crawl to recovery.
The Sub Prime Mortgage Crisis was basically a result of unregulated and mispriced credit default swaps. These are debt instruments used to insure the debt of an entity against default. The mispricing was caused by the lack of projection for credit risks that are above the line such as systematic risks. As these instruments were engineered to compensate for the certain risk using historical data analyses, the “soft” information was not accounted for. When the economy recovered and payments on their mortgage loans shoot up, they had no choice but to default on their loans. Also, with the growth of the housing sector, people were buying houses that they cannot afford seeing the possibility that house prices will continue to rise. As the homeowners witnessed the prices of their houses decrease when the housing price bubble burst, they foreclosed, and as the value of selling their houses were less than their mortgages. This alarmed the banks as they bought mortgage-backed securities resulting them to be afraid of lending to each other because they did not want these toxic loans as collateral. This also added up to the woes of the economy.
II. Statement of the problem
Given the subprime mortgage crisis caused a rapid inflation and devaluation of house pricing and