Map of mortgage defaults 20089/14/2023 But prudence dictates that in making subprime loans, lenders must control the risks by more closely evaluating the borrower, setting higher standards for collateral, and charging rates commensurate with the greater risks. There is nothing inherently wrong or reckless about lending to borrowers with lower incomes and lower credit scores. We examine the origins of the subprime crisis and the various places, some of them surprising, where the effects of the crisis have been found-such as markets in which banks make loans to one another, short-term commercial paper, and even municipal bonds. Just as diseases are passed on by close human contact, pests, and contaminated food, so this financial crisis has been transmitted through connected markets and institutions while leaving others largely untouched. Like an epidemic in which an invisible virus infects many people and communities, the financial crisis spread when losses to intermediaries in one nontransparent market raised concerns about liquidity and solvency elsewhere. What is not so clear, though, is how these losses could spread to other parts of the global financial system. But damage was propagated at each stage of the complicated process in which a risky home loan was originated, then became an asset-backed security that then formed part of a collateralized debt obligation (CDO) that was rated and sold to investors. They started with poor underwriting practices, which became legion. The causes of the crisis in subprime mortgages have become clear. mortgage market could have been contained, but together they caused a crisis that spread across the globe
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