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The subprime loan crisis

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  1. The background of various mortgage classes
  2. The broad based consequences of the subprime regulatory oversight/lender behavior
  3. The short term and long term solutions

There is always debate during an election year whether there is too much or too little government intervention in the social or economic realm, but whatever a person's personal beliefs are, the truth is that government regulation is a fact of life. The topic of this paper is the role that the government should play in regulating the overall market and economy with the primary example being the subprime mortgage business and markets.

[...] One of the basic premises of the loans is that whenever there are people with limited borrowing and financing capacity, people must resort to alternative sources of funding for credit, this being the case in pawn-shops and check cashing outlets; the same concept is carried over onto the mortgage market where subprime loans were developed to target lower income-higher risk individuals who would normally not qualify for a typical loan.[1] In contrast, prime loans were made for those with higher credit score rating, increased job stability and with generally higher earned income. The way these subprime loans are structured, they allow borrowers to take out a mortgage that they would otherwise not be able to receive at a cost greater than prime loans, numerous conditions being included of course: such as higher interest rates and adjustable rates (ARMS) that would reset in 2-3 years after the initial loan was originated. These measures were first put in place to offset the increased risk of delinquency and default. [...]


[...] "Securitisation and the Bank Lending Channel." No 653. November 2007. Havard, Cassandra Jones. "To Lend or Not to Lend: What the CRA Ought to Say About Subprime and Predatory Lending." Florida Coastal Law Review (Summer 2005). Mian, Atif R. and Amir Sufi. [...]


[...] Securitisation and the Bank Lending Channel by Gambacorta, Yener and Ibanez is a paper published by economists at the Eurpean Central Bank explaining the process of mortgage securitization and the different features that it provides; such a the abilitiy to create more loans than capital supply reserves which can either be beneficial if you wish to expand the bank's reach and leverage or it may be a tool for folly if the market collapses for the securitized product rendereing heavy losses as was the case in subprime mortgages. A very useful insight that provides a look at the usefulness of a procedure that often times is not looked favorably upon. Cassandra Havard talks about the merits of subprime loans in To Lend or Not to Lend: What the CRA Ought to Say About Subprime and Predatory Lending. [...]


[...] In the United States, even before the rapid rise of subprime mortgage backed securities the MBO market was significant. As it currently stands, it is not only the biggest fixed income market in the world, but also the largest market with over $ 6.5 trillion in securities; an astounding number considering that the U.S. corporate bond market is only $ 5.4 trillion, and the U.S. treasury accounts for a little under trillion.[12] With an ever increasing number of loans and securitized products, especially ones that are unofficially guaranteed by government agencies Freddie Mac and Fannie Mae, the market was bound to come under demand side pressure when flooded with excess supply, and this is what happened last year. [...]


[...] "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis." University of Chicago (Jan 2008). Silverman, Ronald H. "Toward Curing Predatory Lending." Banking Law Journal (June 2005): 483-669. Stark, Debra Pogrund. "Unmasking the Predatory Loan in Sheep's Clothing: A Legislative Proposal." Harvard BlackLetter Law Journal (Spring 2005). "Subprime time;Credit cards." The Economist Feb 2005. [...]

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