Discuss the Causes of the Sub-Prime Crisis and the Parties Responsible for Such a Crisis.
Discuss the causes of the sub-prime crisis and the parties responsible for such a crisis.
Sherman Oh E S
Principles of banking & finance (PBF)
Mr Marvin Ang
26th January 2013
According to www.investopedia.com, the world “subprime” defines to “A classification of borrowers with a tarnished or limited credit history” and that is what led to the titanic crisis of 2008-2009. This essay will explore the events, which eventually led to many mortgage delinquencies and foreclosure of these sub prime borrower’s homes, causing the insurance company AIG and many other banks to foreclose thus forcing bail out money from the American government to prevent the next great depression.
In the past, traditional mortgage loans that could be acquired from the banks could only be loaned under the grounds of the borrower’s financial status and credit rating. If one did not have good credit rating, the bank would not be able to give him a mortgage loan due to fear of defaults from the customer. Sub prime lending however was different as the borrowers usually had bad credit rating and poor financial status. As such, sub primes loans were higher in risk but also in profit as lenders charged higher default interest rates accordingly.
To understand what caused the sub prime crisis, we have to look back to the year 2001 after the dot com bubble bust where Alan Greenspan who was Chairman of the Federal Reserve lowered interest rates to 1% in hopes of causing a housing boom and steering the economy away from another recession. These low rates injected a lot of excess money in the economy and caused a housing boom. In addition to that, the Gramm-Leach-Bliley Act that was already in place by the Clinton administration in 1999 had already created many new bigger banks such as Citigroup, Bank of America and J. P. Morgan Chase, huge banks that owned many brunches, bought and sold stock and lead corporate mergers. With such a sudden surge of increase of money, banks were now trying to come
Sherman Oh E S
Principles of banking & finance (PBF)
Mr Marvin Ang
26th January 2013
According to www.investopedia.com, the world “subprime” defines to “A classification of borrowers with a tarnished or limited credit history” and that is what led to the titanic crisis of 2008-2009. This essay will explore the events, which eventually led to many mortgage delinquencies and foreclosure of these sub prime borrower’s homes, causing the insurance company AIG and many other banks to foreclose thus forcing bail out money from the American government to prevent the next great depression.
In the past, traditional mortgage loans that could be acquired from the banks could only be loaned under the grounds of the borrower’s financial status and credit rating. If one did not have good credit rating, the bank would not be able to give him a mortgage loan due to fear of defaults from the customer. Sub prime lending however was different as the borrowers usually had bad credit rating and poor financial status. As such, sub primes loans were higher in risk but also in profit as lenders charged higher default interest rates accordingly.
To understand what caused the sub prime crisis, we have to look back to the year 2001 after the dot com bubble bust where Alan Greenspan who was Chairman of the Federal Reserve lowered interest rates to 1% in hopes of causing a housing boom and steering the economy away from another recession. These low rates injected a lot of excess money in the economy and caused a housing boom. In addition to that, the Gramm-Leach-Bliley Act that was already in place by the Clinton administration in 1999 had already created many new bigger banks such as Citigroup, Bank of America and J. P. Morgan Chase, huge banks that owned many brunches, bought and sold stock and lead corporate mergers. With such a sudden surge of increase of money, banks were now trying to come