The Global Financial Crisis Flashcards
(17 cards)
What is a sub-prime mortgage?
Loans for house purchase to people who have low credit ratings with higher risk of being able to make the regular repayment charges.
What is a ponzi scheme?
A fraudulent investment scam which relies on enticing new investors to pay returns to earlier investors and will inevitably collapse when the influx of new investors falls.
What is lax lending?
Lenders approving loans with less rigorous standards such as relaxed credit checks, income verification or asset verification.
What are Mortgage-Backed Securities (MBS)?
A deb security backed by a pool of mortgages and sold to investors, often as low-risk investments.
What caused the banks to be less cautious in their pursuit for profit in the early 2000s?
A long period of steady economic growth and stability since 1995, following the recession in the early 1990s.
Why did the US housing market become an attractive investment in the early 2000s?
Due to stable economic growth, interest rates were highest on mortgage debts and investors could get higher returns.
Why were house prices increasing in the early 2000s?
Interest rates were low, incentivising borrowing, which increased demand. Coupled with limited supply drove up prices.
Why did lenders believe their mortgages and MBS were backed?
They thought that worse case scenario, borrowers default on the mortgage and the lender can resell the house for more money as the demand is there in the economy.
Why did lenders take to sub-prime loans to provide more MBS?
Demand for MBS from investors was rising, and lenders believed the housing market was stable enough that they could cover any defaults by simply re-selling.
What are predatory lending practices?
Loans which are made without verifying incomes, with adjustable rates which are able affordable at first, but eventually increase beyond the borrowers means, forcing them to default.
Why were credit rating agencies rating MBS’s composed of hundreds of sub-prime loans AAA?
The high supply of sub-prime mortgages was a new concept, and so credit rating agencies were using historical data on mortgage debt which deemed it safe, as there were few defaults in the system at this time.
Why did the ratings on MBS not drop as soon as the subprime loans began defaulting?
The rate at which the quanitiy of sub-prime mortgages increased didn’t allow for lower ratings as they were covered by swift reselling, or had few defects due to the adjustable rates not having increased yet.
What is a Collatoralised Debt Obligation (CDO)?
An accumulation of debt , like an MBS, but with more underlying assets.
What is A financial security?
A bundle of financial instruments which represent a type of financial value such as a stock or a bond, enaballing selling and buying in a market.
How did the large distribution of sub-prime MBS lead to the sharp fall of house prices?
More and more mortgages began defaulting (as they were bound to) but because house prices were continuing to rise, houses wouldn’t resell as no one could afford them anymore, so supply was up and demand was down meaning house prices had to fall to maintain equillibrium within the market.
How did the fall in house prices cause more defaults on sub-prime mortgages?
Borrowers who hadn’t yet defaulted, and remained in their home, had mortgages set way above the new, lower, value of their house meaning they stopped paying (defaulted) which only forced house prices down further.
