Financial Crisis 2008
Just after ten years of Asian financial crisis, another major financial crisis now concern for all developed and some developing countries is “Global Financial Crisis 2008.
” It is beginning with the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and spread like a flood. At first U. S banking sector fall in a great liquidity crisis and simultaneously around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. Global issue) According to the specialists, there are many reasons for this global financial crisis. We try to focus some prime reasons behind this crisis, which are as follows- Subprime mortgage crisis- The Subprime mortgage crisis is an ongoing financial crisis characterized by contracted liquidity in global credit markets and banking systems. A downturn in the housing market of the United States, risky practices in lending and borrowing, and excessive individual and corporate debt levels have caused multiple adverse effects on the world economy.
The crisis, which has roots in the closing years of the 20th century but has become more apparent throughout 2007 and 2008, has passed through various stages exposing pervasive weaknesses in the global financial system and regulatory framework. There are some reasons of this subprime mortgage crisis like- Boom and bust in the housing market – Americans spent $800 billion per year more than they earned. Household debt grew from $680 billion in 1974 to $14 trillion in 2008, with the total doubling since 2001. During 2008, the average U. S. household owned 13 credit cards, and 40 percent of them carried a balance, up from 6 percent in 1970.
At beginning of summer of 2006 surplus inventory of homes, causing home prices to decline significantly. Declining price attract people with the easy loan facilities of their banks. And banks are ready with very high risk loans. This excess supply of home inventory placed significant downward pressure on prices. As prices declined, more homeowners were at risk of default and foreclosure. According to the S&P/Case-Shiller price index, by November 2007, average U.
S. housing prices had fallen approximately 8% from their Q2 2006 peak and by May 2008 they had fallen 18. 4%.The price decline in December 2007 versus the year-ago period was 10. 4% and for May 2008 it was 15.
8%. Housing prices are expected to continue declining until this inventory of surplus homes (excess supply) is reduced to more typical levels. Speculation – Speculation in real estate was a contributing factor. During 2006, 22% of homes purchased (1.
65 million units) were for investment purposes, with an additional 14% (1. 07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, nearly 40% of home purchases (record levels) were not primary residences.
NAR’s chief economist at the time, David Lereah, stated that the fall in investment buying was expected in 2006. “Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market Mortgage fraud – Misrepresentation of loan application data and mortgage fraud are other contributing factors. US Department of the Treasury suspicious activity report of mortgage fraud increased by 1,411% between 1997 and 2005 High-risk loans – A variety of factors have caused lenders to offer an increasing array of higher-risk loans to higher-risk borrowers.In addition to considering higher-risk borrowers, lenders have offered increasingly high-risk loan options and incentives. These high risk loans included the “No Income, No Job and No Assets” loans. The banking industry provided home loans to undocumented immigrants, viewing it as an untapped resource for growing their own revenue stream.
Banks, including some major institutions, offered home-mortgage loans to people who don’t have Social Security numbers. Mortgage underwriting – is the process a lender uses to determine if the risk of lending to a particular borrower under certain parameters is acceptable.Most of the risks and terms that underwriters consider fall under the three C’s of underwriting: credit, capacity and collateral. To help the underwriter assess the quality of the loan, banks and lenders create guidelines and even computer models that analyze the various aspects of the mortgage and provide recommendations regarding the risks involved.
However, it is always up to the underwriter to make the final decision on whether to approve or decline a loan. In 2007, 40% of all Sub prime loans were generated by automated underwriting. An Executive vice president of Countrywide Home Loans Inc. tated in 2004 “Prior to automating the process, getting an answer from an underwriter took up to a week. We are able to produce a decision inside of 30 seconds today.
And previously, every mortgage required a standard set of full documentation. Some think that users whose lax controls and willingness to rely on shortcuts led them to approve borrowers that under a less-automated system would never have made the cut are at fault for the sub prime meltdown. Flawed oversight by mortgage brokers – According to a study by Wholesale Access Mortgage Research & Consulting Inc. in 2004 Mortgage brokers originated 68% of all residential loans in the U. S. , with sub-prime and Alt-A loans accounting for 42.
7% of brokerages’ total production volume. The chairman of the Mortgage Bankers Association claimed brokers profited from a home loan boom but did not do enough to examine whether borrowers could repay. Conflict of interest – On April 18, 2006, home loan giant Freddie Mac was fined $3. 8 million, by far the largest amount ever assessed by the Federal Election Commission, as a result of illegal campaign contributions.Much of the illegal fund raising benefited members of the United States House Committee on Financial Services, a panel whose decisions can affect Freddie Mac, but also benefited Republican politicians in general. Some lawmakers received favorable treatment from financial institutions involved in the subprime industry.
In June 2008 Conde Nast Portfolio reported that numerous Washington, DC politicians over recent years had received mortgage financing at noncompetitive rates at Countrywide Financial because the corporation considered for the officeholders under a program.On 18 June 2008, a Congressional ethics panel started examining allegations that chairman of the Senate Banking Committee, Christopher Dodd (D-CT), and the chairman of the Senate Budget Committee, Kent Conrad (D-ND) received preferential loans by troubled mortgage lender Countrywide Financial Corp. Two formers CEO of Fannie Mae Franklin Raines and James A. Johnson also received preferential loans from the troubled mortgage lender. Fannie Mae was the biggest buyer of Countrywide’s mortgages.
Conclusion: Greed leads a great financial crisis for global economics. The banks were not aware about the future.However they can’t think the future. There are lacking of U. S government in their banks rules and regulations. So, for our safety future we have to reserve our cash.
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org/wiki/Financial_crisis_of_2007–2008 http://en. wikipedia. org/wiki/Subprime_mortgage_crisis
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