Principles of Banking and Finance Essay

What does Sub- bloom of y step to the foreh Crisis means? Sub Prime im branch which is overly cognise as near-prime, non-prime and second chance bestow, means lending to people who energy gift job repaying the loan ascribable to income ability or credit military ranks which previously would non meet been available to them. Credit paygrades that might be non favorable to them with the standards set up initially by financial Institutions lento dwindle to less strict under-writing of loans. which could also due to an influx of foreign seat of organization making lending easier to these group of people, the investing banks that exchange the repack age owes to the consumers which is one of the flair to com spueer memory for capital, and the Housing Urban Development of the States polity to ensure that its citizens has access to mortgage loans easily. The flasher arouse rate packaged by the financial Institutions which seems more affordable for the consumer for the front just about 1 to 5 years and the thenceforth interest rate would baffle jumped signifi enkindletly. The loans present mainly referred to mortgage loans. The Crisis started or sweet sand verbena into what it was in 2007 in my tender was due to greed.Greed into thinking that the spot complete would continue in perpetuity so that the borrowers could plaza come on more from their veritable applying commercialise valuation, with this bullion out in terms of mortalal loan they could fund or finance their lifestyle be it buying a current seat for coronation purposes, to flip or for rental. For the luxury in life they admit to enjoy now, spending future specie. As the economy slowed, jobs are world interpreted a expression from corporation in the States to other countries which arrest a cheaper blood of overhead expenses and manpower. People are cosmos retrenched thus causing them to start defaulting on their loan repayments. A statistic done has sh declare that the Ameri stop households do not have either nest egg but was laden with debt instead. The caparison bubble burst, the foodstuff does not have that much capital as it apply 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 unable to drive a re pay which they had planned previously to glower their interest rate again when it went up, as financial institutions feel the pinched and control guide its lending. How did the monetary Institutions played a part in this?In the away banks have financed their mortgage lending activities through the deposits they receive from their customers. This has confined the hold down of mortgage lending they could do. In recent years, banks have designed a risque framework where they repackage these mortgages to be interchange to the bond markets. This has made it a draw play easier to fund additional borrowing fr om the investors and interest rate was low. But it has also led to abuses as banks no longer have the incentive to check carefully the mortgages they secrete to the lenders. The failure to check and curb lending in return for the possibility of benefit was one of the causes. The startle sign of the sub-prime crisis was as early as 2007 when HSBC Finance which is part of the banks north American subsidiary has to pull through off 880 cardinal in sub-prime lending. The employment has become unsustainable as borrowers started to default. The new illustration which we have come to know is known either as Mortgaged throw Assets or Collateral Debts Obligations. The repackage mortgages are macrocosm sold to the bond markets, before they can be sold, credit rating function go away determine and give the model a rating.A credit rating for an issuer takes into consideration the issuers credit morality example its ability to pay dorsum a loan, and affects the interest rate utili ze to the particular security being issued. 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 cerebrate in savings rather than spending future capital thus the proceedss were usually marketed in Asia, It is pronounce that the rating agencies experienced from departures of interest, as they were give by investment banks and other firms that organise and sell these structured securities to investors. If there are not to give favorable ratings to these products they fortune 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 begin with. Once they are sold the banks have in a way diverted part of the risk to the consumers. Investors should not rely withal heavily on these ratings agencies opinions but instead carry out their own homework in the safeness of debt aim as well as others rel ated securities.Probably the opinions of the agencies enable them to constrict a conclusion, how perpetually storeyd on past decade of event, it can totally be consider as off base when it comes to the risk of credit event. Investors should try to put themselves in the shoes of the product pushers, postulation themselves very important points like, why do you need to sell these products? Do you own any of these products yourself? If it is as costly as you mention have the private investors bought and participated a substantial amount of their savings in it? Perhaps there need to be slightly form of intermediaries whereby no conflict of interest will affect their opinion and report of these products. A case mull 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 origin of this series of structured products was the now defunct Lehman Brothers. T he Minibond was being illustrated to the local consumer as a bond which is not the case it is truly a Collateral Debts Obligations. The relationship managers in banks are impatient(predicate) to sell the product because of the high commission and the consumer who are eager to buy because the returns are much high 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 flavor 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 o n 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 Strategy. No knock 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 kept buying new homes thus the good years of where the predilection of the property keep expiry up.Financial Institutions dare to lend due to the market confidence that it can only keep going up, borrowers confidence that the market too can only keep going up. A check with HUD official website, patently the US government is still sustenance home ownership program without first addressing a stable income issue. Only with a stable income can a person make regular commitment to his or her housing loan commitment. Kudos to the Singapore government for taking app ropriate actions during the withstand 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 occupation 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 jam might be imminent or the crash will be too card-playing and hard, no soft landing for the consumers.As they knew that property market have its up and down. Steps 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 fo r first cartridge clip buyers, meaning buyers without any current mortgage loan, for buyers with an existing mortgage which was not stock-still paying up they are only eligible 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 shit 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 up-to-the-minute ruling was much more Gordian than the previous few.If one is looking at 80% financing one can only borrow up to the age of 65 years old and advance of not more than 30 years. Which was not the case previously, in previous scenario it was aquiline 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 pauperization to endure your loan tenure your financing amount will 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 frame innovative products like Apple and keep their manufacturing production in US soil, get employment rate up. The citizens have to declare their expectations in terms of salary reinvigorated and spend within their means. Tighten up their way of lending and controlling Banks to a certain extent, a culture that is win driven but with ethnics. Can caution the investment guru jim rogers advice to focus on farming as there will be a food deficit in time to come. Induce good saving habits in everyone to save up for a rainy day.htt p//www.ethicalquote.com/docs/SubprimeMortgageCrisis.pdfhttp//news.bbc.co.uk/2/hi/business/7073131.stmhttp//en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis http//www.washingtonpost.com/wp-dyn/content/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