What were the main causes of the 2007 – 2010 mortgage mess? What could have been done to prevent it?
the main causes of the 2007 – 2010 mortgage mess were:
1. Creation of housing bubble: Banks had provided large amount of
housing loans assuming that the house can be used as mortgage. At
that time prices of houses were artificially very high creating a
housing bubble. When the bubble burst prices of house nosedived
creating a crisis when customers of banks defaulted their payments.
This kickstarted the recession.
2. Loans to subrime borrower: Loans were provided even to less
credit worthy customers . This increased the chance of default and
loans given to such customers became toxic assets.
3. CDS (Credit Default Swap) : The credit risk of investment banks
were insured by third party. When default increased the bad debt of
investment banks could not be covered by insurance companies as the
default was so huge that insurance companies could not cover the
losses. Lehmann Brothers was the biggest casualty of CDS
These Could have been prevented by following :
1. If banks had less exposure to subprime borrowers
and If banks had kept securities or mortgage in lieu of
loans then the losses would have been less.
2. The reserve requirement at the time of crisis was very liberal
and this allowed banks to loan huge amount to subprime borrowers.
If the reserve requirements were higher it would have been
prevented.
3. Credit rating agencies should have performed an honest
assessment which would have shown which companies have poor credit
rating and this would have prevented banks from providing loans to
them.
What were the main causes of the 2007 – 2010 mortgage mess? What could have been...
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