Principles of Banking and Finance Essay

What does Sub-Prime Crisis means? Sub Prime alter which is also know as near-prime, non-prime and second chance add togethering, means lending to people who index have trouble repaying the give receivable to income expertness or ac recognise places which previously would not have been available to them. Credit ratings that might be not indulgent to them with the standards set up initially by pecuniary Institutions slowly dwindle to less strict under-writing of loans. which could also due to an influx of foreign capital making lending easier to these group of people, the investiture banks that change the repack mount up mortgages to the con meaningers which is one of the government agency to depot for capital, and the Housing Urban Development of the States policy to ensure that its citizens has access to mortgage loans easily. The sordider interest esteem incase by the financial Institutions which seems more affordable for the consumer for the jump 1 to 5 long time and the thereafter interest rate would have jumped significantly. The loans here mostly referred to mortgage loans. The Crisis started or snowball into what it was in 2007 in my opinion was due to greed.Greed into thinking that the attri notwithstandinge boom would continue in perpetuity so that the sop upers could cash out more from their current property grocery valuation, with this cash out in terms of personal loan they could origin or finance their biographystyle be it buying a hot property for investment purposes, to flip or for rental. For the luxury in life they choose to enjoy now, outgo future money. As the parsimoniousness slowed, jobs atomic number 18 macrocosm taken a guidance from corporation in America to different countries which have a cheaper source of overhead expenses and manpower. People argon world retrenched thus causing them to start defaulting on their loan repayments. A statistic do has shown that the American households do not have any savi ngs exclusively was laden with debt instead. The housing bubble burst, the market does not have that very a lot capital as it used to have to continue to push property prices up anymore, thus causing the market to slow overall, foreclosures of their properties was happening. Consumers was also inefficient to obtain a refinancing which they had planned previously to lower their interest rate again when it went up, as financial institutions feel the pinched and control lead its lending. How did the Financial Institutions play a part in this?In the one-time(prenominal) banks have financed their mortgage lending activities done the deposits they receive from their customers. This has confined the amount of mortgage lending they could do. In recent years, banks have designed a new-fashioned mildew where they repackage these mortgages to be change to the bond markets. This has made it a lot easier to fund additional borrowing from the investors and interest rate was low. But it h as also led to abuses as banks no longer have the incentive to check conservatively the mortgages they issue to the lenders. The failure to check and curb lending in comeback for the possibility of profit was one of the get alongs. The first sign of the sub-prime crisis was as early(a) as 2007 when HSBC Finance which is part of the banks north American subsidiary has to bring through transfer 880 one thousand thousand in sub-prime lending. The business has become unsustainable as borrowers started to default. The new model which we have come to know is known either as Mortgaged backed Assets or Collateral Debts Obligations. The repackage mortgages are being interchange to the bond markets, before they can be sold, credit rating function will determine and give the model a rating.A credit rating for an issuer takes into consideration the issuers credit worthiness example its ability to pay back a loan, and affects the interest rate applied to the specific security being issu ed. These MBS or CDOs as it has come to know are usually marketed to countries which has a surplus in its balance sheet as it was generally known that Asians believe in savings rather than spending future money thus the produces were usually marketed in Asia, It is allege that the rating agencies experienced from conflicts of interest, as they were paid by investment banks and other firms that tog out and carry on these structured securities to investors. If there are not to give favorable ratings to these products they risk the underwriter of these securities to another rating agency. It would be hard to sell these products if they are not being given a rating to set down with. Once they are sold the banks have in a way diverted part of the risk to the consumers. Investors should not rely similarly intemperately on these ratings agencies opinions but instead carry out their own preparedness in the safeness of debt level as well as others related securities. in all probability the opinions of the agencies enable them to get a conclusion, however based on past decade of event, it can only be consider as off base when it comes to the risk of credit event. Investors should try to put themselves in the position of the product pushers, asking themselves very important points resembling, why do you have to sell these products? Do you own any of these products yourself? If it is as good as you mention have the private investors bought and participated a substantial amount of their savings in it? Perhaps there need to be some act upon of intermediaries whereby no conflict of interest will affect their opinion and plow of these products. A case study in capital of capital of Singapore itself which has made headlines during this crisis was the minibond saga which was being sold in Singapore by a couple of Financial Institutions. The originator of this series of structured products was the now defunct Lehman Brothers. The Minibond was being illustrated to the local anaesthetic consumer as a bond which is not the case it is actually a Collateral Debts Obligations. The relationship managers in banks are eager to sell the product because of the high commission and the consumer who are eager to buy because the returns are much higher than the fixed deposit being offered by the banks.An estimated of 500 million Singapore dollars was purchased for the Minibonds by consumers. It stirred a series of conflicts with the Financial Institutions that sold these products, the consumers cried fouled into being mis-sold of it, some of the consumers managed to get back part of their investment and vowed not to touch these structured products ever again. We can take a look back into the 1990s where one of the policy set up and enforce by the Housing and Urban Development of America, was one of the cause of the sub prime crisis. With the support of the government, HUD has less mortgage restriction requirements on its borrowers. The mandate was that Fannie Mae and Freddie Mac which was regulated by HUD, was to generate up to 8 million more homeowners in America. It was known as the National Homeownership outline. No down payment was required, 100% financing for the property was the norm. This was partly possible due to the influx of cheap money in the market, with this cheap money consumers speculated with the market, they unplowed buying new homes thus the good years of where the appreciation of the property keep expiry up.Financial Institutions dare to lend due to the market confidence that it can only keep sledding up, borrowers confidence that the market too can only keep going up. A check with HUD official website, apparently the US government is nonetheless supporting home ownership program without first addressing a immutable income issue. Only with a stable income can a person catch regular commitment to his or her housing loan commitment. Kudos to the Singapore government for taking appropriate actions during the last few years when their economy was recovering, the measures taken to prevent over speculation of the property market in Singapore. Homebuyers with the extra cash were snapping up properties, either for owners transmission line or for investment purposes. The government either learned from the Sub-prime crisis or foreseen that if it continues the way it is going, a market crash might be imminent or the crash will be too fast and hard, no demulcent landing for the consumers.As they knew that property market have its up and down. travel was taken, it used to be 90/10. Whereby the buyer have to come up with 10% cash and the remaining 90% can be financed through a financial institutions regardless of the number of property they currently owned. It was changed to 80/20 rule, 20% of which is the owners own cash an 80% through financing. Surprisingly it did not deter the consumers, the market still kept soaring. The next rule implemented was the 80/20 rule for first time buyers, meaning b uyers without any current mortgage loan, for buyers with an existing mortgage which was not yet paid up they are only suitable for 60/40. 60% financing for their new property and an increased in the stamp duty to be paid for to the government if it was their 3rd property for Singaporean. The hardest hit was the foreigners who are seeking to invest their money in Singapore properties as they have to pay additional 10% stamp duty which is likely to deter most of them. Prices still kept going up, the modish ruling was much more complex than the previous few.If one is sounding at 80% financing one can only borrow up to the age of 65 years old and tenure of not more than 30 years. Which was not the case previously, in previous scenario it was restricted on different Banks guideline in Singapore, they could lend up to the age of 70, 75 or 80. They stepped in and put a cap at 65 as they believe that is the retirement age. If you want to extend your loan tenure your financing amount wil l drop to either 60% or 40%. I believe the government did this as they knew that the US is going ahead with Quantitative Easing 3, they want to prevent too much hot money from landing in Singapore shore.To sum up, we learned from our mistakes and grow not to make the same mistake twice. A healthy economy is based on real economic goods with value. hopefully US can still continue to create innovative products like Apple and keep their manufacturing production in US soil, get purpose rate up. The citizens have to maintain their expectations in terms of salary quick of scent and spend within their means. Tighten up their way of lending and imperious Banks to a certain extent, a culture that is profit driven but with ethnics. Can heed the investment guru jim rogers advice to focus on agribusiness as there will be a food dearth in time to come. Induce good saving habits in everyone to go along up for a rainy day.http//www.ethicalquote.com/docs/SubprimeMortgageCrisis.pdfhttp//news.bb c.co.uk/2/hi/business/7073131.stmhttp//en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis http//www.washingtonpost.com/wp-dyn/ field/article/2008/06/09/AR2008060902626.html http//www.thetruthaboutmortgage.com/mortgages-with-no-money-down/ http//www.telegraph.co.uk/finance/markets/2816291/HSBC-hit-by-sub-prime-crisis.html