Essay on Finance Major

2611 Words Jul 25th, 2012 11 Pages
MBA 613, Investment Analysis

case study, Subprime Meltdown: American Housing &
Global Financial Turmoil

Dr. Farooq Malik

Main Problems:
1. Financial crisis
2. Before 1990’s many households went into default.
3. In early 2008, the most immediate problem was a wave of foreclosures
4. In 1996 accelerated in average house prices across the United States had risen fairly to reach about 12 percent per annum in late 2005. After this, there was anxiety about inflation and interest rates were increased steadily, with the Federal Funds rate reaching 5.25% in September 2006.
5. Failure of about half of the 32,234 Savings and Loan Associations “S&L’s” that existed in 1986.
6. In 2006, credit risk.
7. Losses
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Possible solutions took in consideration:
1. Redesigning the regulatory overlay of the global financial system in order to make it more robust without crippling its ability to innovate and spur economic growth.
2. One government response was to create the Home Owners Loan Corporation (HOLC), which made simultaneous offers to borrowers and lenders. If they both agreed, lenders received HOLC obligations in exchange for their claims against households, although this exchange required banks to recognize a loss on their assets. Households, meanwhile, free themselves of their previous obligation by accepting new “self-amortizing” mortgages with fixed payments whose terms were based on new assessments of their home’s worth.
3. Lawmakers needed to understand what had happened.
4. Reset Federal Reserve’s policy to adopt interest rate to fit the situation.
5. Set up a special institution to dispose of the failed S&L’s assets. Boost the securitization of mortgages by two government-sponsored enterprises (GSEs)
6. GSEs used standards that were similar to those of traditional originators. Only senior mortgages were taken and generally required the loan-to-value ratio (LTV) to be below secure sufficient collateral, also apply through conventional lenders for loans insured by the Federal Housing Administration

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