1.What factors led to the mortgage default crisis? 2.How did mortgage defaults a

Question

1.What factors led to the mortgage default crisis?

2.How did mortgage defaults affect banks involved in mortgage lending and mortgage investing? 3.Securitization? TARP? What do these mean?

4.How did mortgage-backed securities spread losses during the mortgage default crisis?

5.How does TARP illustrate the problem of moral hazard?

6.What did the Federal Reserve do during the financial crisis of 2008 and 2009?

7.How did the recent financial crisis affect the financial services industry?

8.What are some of the major provisions of the Wall Street Reform and Consumer Protection Act?

Explanation / Answer

The main reason for mortgage crisis is the default of home loans which triggers foreclosures and sell offs. Some other reasons include: 1.High Risk Loans: These are over levered loans where the financing is done more than the suggested values to be given. This results in immediate sell off when the property falls below the loan amount and to avoid further loss the banks commence raising the installment. 2.Bust in Housing Market: The housing market has seen sizable pressure as a result of the over pressure on most homeowners by increasing rates. This impacts the payment capacity and results in default. 3.Speculation: The main aim of purchases in mortgage market in the past years was investment and not for self living which marked early selling of the property even at discount. 4.Mortgage Frauds: The frauds in the Mortgage market is leading to increasing crisis as the banks and government authorities are not able to derive borrowers after over financing. 5.Speculation: The main aim of purchases in mortgage market in the past years was investment and not for self living which marked early selling of the property even at discount. Effects of Mortgage crisis The mortgage crises have devastated the financial markets and the pinch is felt by most equity markets across the globe where money from U.S. institutions was instilled. The sellout in major equity markets is the enact of the mortgage crisis. The major blow was given to the homeowners as the banks came out on streets on a selling binge and sold most foreclosures in auctions to recover their debt. This has destroyed the sentiment in the financial markets and major sell off for liquidity peril is seen overall in the U.S. financial markets. securitization:~ Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS). tarp:~ The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector that was signed into law by U.S. President George W. Bush on October 3, 2008. It was a component of the government's measures in 2008 to address the subprime mortgage crisis.

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