AFF5230 L 11 Sub Prime

AFF 5230

Lecture 11

Department of Accounting and Finance Slide 2

Learning Objectives

• By the conclusion of the lecture:

– Students should understand the structure of sub prime crisis:

> Sub prime housing loans;

> Mortgage & bond insurers ( Monoline);

> Collaterised debt obligations;

> Credit Default swaps;

> Structured Investment Vehicles.

• Have defined some of the causes of the crisis.

• Have noted the attitude of financial institutions & regulators.


References

• Reader : pp. 285-289.• Text: Chapter 32-pages 629-639,641-642.• Handouts.


Sub Prime crisis

• This lecture is a natural extension of the securitisation lecture.

• In Chapter 2 of our text, Fabozzi and Modigliani state:

• “ The major financial innovations are discussed throughout this book; however, we conclude this chapter with a key innovation in the 1980’s that dramatically influenced the role of financial intermediaries-asset securitisation”.

• In its simple form, asset securitisation was a valuable source of alternative finance for banks, and increased their financial

flexibility.


(2)

The concept was extended to cover:HOMOGENEOUS STRUCTURE

Mortgages-residential, industrial, commercial;Loan receivables.Cash flow receivables-credit card, debtors, specific loans,

film revenues.NON HOMOGENEOUS STRUCTURES

Collaterised debt obligations- effectively “a cocktail “of assets.

Further, financial engineering was employed to create synthetic financial instruments which in many cases had no specific asset backing.


(3)

• Financial Engineering definition: *– “ Financial Engineering is the successful

implementation of the investor banker’s creativity in security design. The application of mathematical and statistical modeling, together with advances in computer technology provides the necessary infrastructure for financial engineering”.

– * “The Business of Investment Banking”, K Thomas Liaw


(4)

As previously advised, there are a range of parties involved in the securitisation process: Mortgage originators; Mortgage brokers; Mortgage insurers; Mortgage servicers; Investment banks; Rating agencies; Investors- seeking to maximise their income return within their

preferred risk profiles.Each of theses parties ( other than investors) receives a

fee in part related to value of transactions- so the inducement to increase volume was significant.


A driving principle behind the sub prime crisis

• “GREED IS GOOD”• (SOURCE:Gordon Geko- “Wall Street” and

“Wall Street : Money Never Sleeps”.)


Structure of sub prime crisis

• The US sub prime housing market;– Associated difficulties for related parties-

mortgage insurers; rating agencies.

• The Collaterised Debt Obligation market (CDO’s);

• The Credit Default Swap market (CDS’s).• Structured Investment Vehicles (SIV’s)

and CLO’s.


Summary of structure


Sub prime housing crisis

• Sub prime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates of traditional housing mortgages because of problems with their credit history or the inability to prove that they have enough income to support the monthly payment on the loan for which they are applying.

• Effectively NIJA’s:– No income;– No job;– No ability to repay.


Community Reinvestment Act

• The original Act was passed by the 95th United States Congress and signed into law by President Jimmy Carter in 1977 (Pub.L. 95-128, 12 U.S.C. ch.30).[38] Several legislative and regulatory revisions have since been enacted.

• is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.[1][2][3] Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.[4][5] The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation. (See full text of Act and current regulations.[1

• ] The same Federal banking agencies that are responsible for supervising depository institutions are also the agencies that conduct examinations for CRA compliance.[10] These agencies are the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS).

http://en.wikipedia.org/wiki/United_States_Congress

http://en.wikipedia.org/wiki/Jimmy_Carter

http://hdl.loc.gov/loc.uscongress/legislation.95hr6655

http://en.wikipedia.org/wiki/Title_12_of_the_United_States_Code

http://www.law.cornell.edu/uscode/12/usc_sup_01_12_10_30.html

http://en.wikipedia.org/wiki/United_States_federal_law

http://en.wikipedia.org/wiki/Banks

http://en.wikipedia.org/wiki/Savings_and_loan_association

http://en.wikipedia.org/wiki/Redlining

http://en.wikipedia.org/wiki/Federal_Reserve_System

http://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation

http://en.wikipedia.org/wiki/Office_of_the_Comptroller_of_the_Currency

http://en.wikipedia.org/wiki/Office_of_Thrift_Supervision


(2)

• The law, however, emphasizes that an institution's CRA activities should be undertaken in a safe and sound manner, and does not require institutions to make high-risk loans that may bring losses to the institution.[3][4] An institution's CRA compliance record is taken into account by the banking regulatory agencies when the institution seeks to expand through merger, acquisition or branching. The law does not mandate any other penalties for non-compliance with the CRA.

• Before the Act was passed, there were severe shortages of credit available to low- and moderate-income neighborhoods. In their 1961 report, the U.S. Commission on Civil Rights found that African-American borrowers were often required to make higher downpayments and adopt faster repayment schedules. The commission also documented blanket refusals to lend in particular areas.

• Contributory factors in the shortage of direct lending in low- and moderate-income communities were a limited secondary market for mortgages, informational problems to do with the lack of credit evaluations for lower-income borrowers, and lack of coordination among credit agencies.

http://en.wikipedia.org/wiki/U.S._Commission_on_Civil_Rights

http://en.wikipedia.org/wiki/Downpayment


(3)

• Although not part of the CRA, in order to achieve similar aims the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required Fannie Mae and Freddie Mac, the two government sponsored enterprises that purchase and securitize mortgages, to devote a percentage of their lending to support affordable housing.

• In July 1993, President Bill Clinton asked regulators to reform the CRA in order to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden.[52] Robert Rubin, the Assistant to the President for Economic Policy, under President Clinton, explained that this was in line with President Clinton's strategy to "deal with the problems of the inner city and distressed rural communities"

http://en.wikipedia.org/wiki/Federal_Housing_Enterprises_Financial_Safety_and_Soundness_Act_of_1992

http://en.wikipedia.org/wiki/Fannie_Mae

http://en.wikipedia.org/wiki/Freddie_Mac


(4)

• Some economists, politicians and other commentators have charged that the CRA contributed in part to the 2008 financial crisis by encouraging banks to make unsafe loans. Others however, including the economists from the Federal Reserve and the FDIC, dispute this contention. The Federal Reserve and the FDIC holds that empirical research has not validated any relationship between the CRA and the 2008 financial crisis.[97][98]

• Economist Stan Liebowitz wrote in the New York Post that a strengthening of the CRA in the 1990s encouraged a loosening of lending standards throughout the banking industry. He also charges the Federal Reserve with ignoring the negative impact of the CRA.[92] In a commentary for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, charged the CRA with "forcing banks to lend to people who normally would be rejected as bad credit risks."[99]


(5)

• The conclusions on the effects of this Act are variable.


Background

• Prior to 2005 subprime mortgage loans accounted for approximately 10% of outstanding mortgage loans. By the end of 2006 the originations of subprime totalled $650b, which was 20% of new residential mortgage loans.

• The growth in the market can be attributed to a number of factors:– Borrower friendly underwriting criteria;– Favourable conditions for the residential housing market that

applied from 2002 to 2005:> During this period, home price appreciation gave borrowers

an equity cushion, so that sub prime borrowers who experienced financial hardship could refinance their loans or pull equity out of their properties . As a result the loss ratio was low.


(3)

• The increase in securitisation of subprime loans-typically as asset backed securities (ABS) in which senior and subordinate tranches were created:

– S&P estimated that in 2006 subprime ABS constituted more than 70% of the collateral in rated mezzanine structured finance CDO’s.

– The tremendous demand for these high yielding securities greatly increased the volume of credit available to subprime borrowers.

• Technological advances in mortgage lending, such as automated underwriting systems, have allowed originators to make rapid decisions based on credit scores & other available credit information of prospective borrowers- man vs. machine!

Use of risk layering• Definition: risk layering is a procedure for reducing the lending

standards as market conditions worsen. It is designed to maintain the level of loans (& hence the fee income earned by the respective parties)..

• The increase in risk layering occurred in response to the problem of maintain housing affordability. Rapid price appreciation from 2003 to 2005 made home buying less affordable. To address this issue, and maintain volume of home loans:

– lenders developed subprime mortgage loans which combined the lowest possible down payments, with

– relaxed underwriting standards. Mortgage brokers & mortgage bankers were principal lenders-why?


(2)

• Example of the risk layering positions used in subprime mortgages are: – A typical subprime borrower with a credit score of between 450 & 680

could obtain a loan :> With little or no down payment:

– Two mortgages arranged-one for 80%, the other a “piggybank” loan so that the borrower made no down payments. A higher interest rate applied on the second loan.

– Provide little or no documented proof of income or assets;> Extended beyond original concept of self employed professionals

(Alt A loans) who could not readily substantiate earnings to persons with impaired credit histories & first time borrowers. The extension to stated income loans, whereby limited evidence was provided-“liar loans” was a rising sub class of these loans.

• .


(3)

• Obtain a loan with a low initial “teaser” interest rate that reset to a new higher rate after 2/3 years, or obtain a loan with a term beyond 30 years with associated lower monthly payments

• Further definition:– Alt-A mortgages are similar to low documentation loans that are

marketed to borrowers in Australia by lenders such as St George, Bluestone and Westpac.

– Alt-A loans often require less proof of the applicant's income and are often targeted at self-employed individuals and other potential borrowers who cannot provide standard documentation.

– According to Standard & Poor's, Alt-A borrowers may also be able to secure other features that fall outside standard underwriting guidelines, including higher loan to value ratios. The Alt-A loan category on the credit risk spectrum sits between prime and sub prime mortgages.


Other Parties Involved

Mortgage brokers. • A party which has received some criticism is the mortgage

broker.– Mortgage brokers don’t lend their own money, there is

not a direct correlation between loan performance and compensation.

– Accordingly, in 2004 mortgage brokers originated 68% of all residential loans in the US , with subprime and Alt A loans accounting for 42.7% of brokerages total production volume.

• It has been claimed that brokers profited from a home loan boom, but were not concerned to examine whether borrowers could repay.

Role of mortgage insurers/Monoline insurance/rating agencies• Mortgage/bond insurance:

– A process whereby issuers of bonds can pay a premium to a third party, who will provide interest and capital repayments as specified in bond in the event of the failure of the issuer to do so.

– Berkshire Hathaway acts as a mortgage insurer.

– Companies whose sole business is to provide bond insurance services to one industry are termed monoline insurers.

• No monoline insurer had been rating downgraded or defaulted until 2007:

– In November 2007 ACA, the only single A rated insurer reported a US$1bn loss:


(2)

> ACA advised that if it was downgraded below A-, collateral would have to be provided;

> In December, it was downgraded to CCC.

–Credit rating agencies placed other monoline insurers under review.

–Berkshire Hathaway was forced to unwind 26,000 undesirable swaps at loss of US$400m.*

–This year many municipal and institutional bonds have traded at prices as if they were uninsured-effectively making the monoline insurance effectively worthless.


(3)

• Rating agencies have been criticised on many counts:

– Monoline insurers were not downgraded promptly;

– Rating agencies may failed to fully understand the complexities of structured finance instruments.

– Rating agencies failed to acknowledge the problems of lack of market liquidity.


Housing market slowdown

• In 2006, the rate of annualised increase in US housing prices slowed- meaning the credit risk could not be masked by rising property prices.

– By March 2007, 13% of sub prime borrowers were delinquent on their payments by 60 days or more.

• Prior to 2006 many loan sale agreements between subprime lenders & loan purchasers who packaged the loans into Asset Backed Securities, provided for little recourse on sale.

– The credit risks associated with the subprime loans were largely passed to the purchasers of the loans.

• However, with the weakening of the housing market in 2006, many investment banks & other investors in sub prime loans recognised the additional risk characteristics and required lenders to assume the risk of default occurring within the first few months of origination- early payment defaults.


(2)

• A large increase occurred in early 2007 of early payment defaults, the most frequent occurring in a stated income or limited documentation loan for a first time borrower, together with a “piggyback” loan.

• Under the terms of many recent loan sale agreements, investors have right to require loan sellers to purchase early payment default loans.

• Many specialty finance lenders have lacked the funding liquidity, capital or earnings to meet their repurchase obligations.

– Hence loan sellers have had the limited option of a forced sale, filing for bankruptcy or gone out of business. In most cases, these institutions were not covered by federally insured deposits.

– Therefore, the inability to enforce early payment default clauses, led to the occurrence of significant loan losses by banks.


The problem (reasons for fall of sub prime market)- as summarised.• Loans sourced by brokers

• Warehoused by thinly capitalised mortgage bankers

• Insurance or CDS’s arranged- in some cases by parties which lacked financial worth.

• Sold to investment banks, who manufactured CDO’s

• Rated by rating agencies

• Sold to institutional investors

• All income- from original sourcing to final placing was fee income-bigger volume- the bigger the income.

• Market dealt with inexperienced & uninformed investors.


Impact of the sub prime meltdown

– Market reaction-

> Consolidation has occurred in US subprime mortgage market as large financial institutions and investment banks have acquired subprime mortgage originators and servicers.

> Underwriting standards have been tightened.

> Purchasers are examining the loans more critically.

– Sub prime originations dropped by more than 30% in first quarter of 2007.


(2)

• Impact on individual borrowers:

– Resets on variable interest rate mortgages has resulted in greater financial hardships for borrowers when rates rose. Tighter lending standards & a slump in housing prices have restricted refinancing opportunities.

– If defaults occur, the sale or foreclosure of properties is likely to result in losses due to drop in house prices.

– Property investors have often walked away from their obligations.


(3) Impact on regulators

• Numerous hearings & enquiries but no specific regulatory and legislative responses to date.


The combined consequence of these factors was:

• The higher demand resulted in a steady increase in the risk characteristics of subprime loans;

• Incentive structures that tied lender revenue to the number of subprime loans written made origination volume the primary objective of some lenders;

• Subprime loans were originated and sold into the secondary market as long as lenders could record profits from the sale of such loans or funding from securitisation.

• As downturn in the US market combined with a rise in interest rates reduced the number of loans written- but the demand among mortgage lenders remained high- leading to a loosening

of underwriting standards.




Collaterised debt obligations • CDO’s are pools of diversified assets, bonds, loans, residential

mortgages which are parceled up by investment banks and then split into tranches of varying risk and sold on to investors. Because the different tranches have varying credit ratings and durations, investors choose the tranche they prefer, depending on their risk/reward requirements.

• Effectively, it is a “fruit salad” of various forms of assets.

Example of a CDO


Overview of CDO problem

• Banks sold off their riskiest mortgages by repackaging them into securities called collaterised debt obligations.

• The tiers were structured according to different investors tastes. The top tier tranches which comprised 80% of bonds would have first call on underlying cash flows and could be sold with an AAA rating. The low tiers absorbed first dollar risks but carried higher yields.

• This form of securitisation actually increased risks- by transferring ownership of mortgages from bankers who knew their customers to investors who did not.


Use of financial engineering

• Let’s construct financial instruments which appeal to a range of investors-meeting their various risk & return demands.

• The senior slice, the AAA-rated tranche, tends to appeal to banks and financial institutions.

– Lower down the credit rating scale, say BBB-rated tranches and below, it is insurance companies and hedge funds that are the major buyers, since they can pick up increased yield compared to similarly rated bonds.


(2)

• “You buy a AA-rated corporate bond you get paid Libor plus 20 basis points; you buy a AA rated CDO and you get Libor plus 110 basis points,” says Mr O’Carroll at Fortis.

• Hedge funds have taken a more active interest in the unrated subordinated or equity portion where the greater returns are to be had.

• “Hedge funds are more comfortable with leverage and can be more sophisticated in their analysis of these products. They have the ability to hedge certain risks out, because of the level of sophistication they have,” says Mr Powell. (in retrospect- this represents an optimistic claim).


In Summary

• Collateralised debt obligations (CDO’s) are about yield enhancement, and in low yielding times investors are going to be tempted to consider new ways of increasing their fixed income returns. CDO’s come in a range of different guises.

– CDO’s can be cash-based, where the underlying is a portfolio of bonds, or more recently synthetic CDO’s have emerged, which refer to a pool of derivatives, usually credit default swaps.

– Other forms are CLO’s with reference to loans, and CBO’s with reference to bonds.


(2)

• Starting around 2005, securitisation, enhanced by financial engineering, became a mania. It was easy and fast to create “synthetic securities” that mimicked the risks of real securities but did not carry the expense of buying and assembling actual loans.

• Risky paper could be multiplied well beyond the actual supply in the market. Investment banks could slice up CDO’S and repackage them into CDO’s of CDO’s, or CDO’s squared or even CDO’s in triplicate.

• In this way , more AAA liabilities were created than there were AAA assets. Towards the end, synthetic products accounted for more than half the trading volume.


How CDO’s can multiply – CDO squared


How CDO’s can multiply- CDO cubed


Goldman Sach’s problems with CDO’s

• Problem one:– Selling a CDO (Timber Wolf) which their

own managers said (as recorded on tape) was a “sh---ty” investment.

• Problem 2:– Alleged involvement in fraud with a hedge

fund over CDO’s sold to clients- Abacus CDO.


Timberwolf

• Australian investors were adversely affected:– Basis Capital, a hedge fund lost at least $56m;– Local Government Financial Services, an

investment manager in NSW purchased triple A rated debt for $42m & double A rated debt for $38.6m.

> Paid $11.25m, with balance financed by margin calls.


(2)

– Sales were structured as credit default swaps between fund and Goldman Sachs, with Timberwolf as referenced entity.

– The basic facts are that Goldman sold BYAFM a bunch of AAA and AA rated CDOs in Timberwolf. They were worthless, like other CDOs that turned out to be fancy names for home loans made to Americans with no hope of repaying them.


(3)

• Meanwhile, Goldman, which had seen problems but had not informed investors, decided to bet against the market by taking short positions.

• http://www.youtube.com/watch?v=VVfGB_jvz2s&feature=related


Goldman Sachs and Abacus problems

• SEC charged Goldman Sachs with fraud in structuring & marketing of CDO’s tied to sub prime mortgages.

• Ultimately settled for fine of $633m.• Goldman Sachs structured and marketed

a synthetic collaterised debt obligation that hinged on the performance of subprime mortgage backed securities.


(2)

• Paulson & Co hedge fund provided advice on which securities should be included in the portfolio. Paulson then shorted the RMBS portfolio it had helped to create (logic/interest conflict?) by creating credit default swaps with Goldman Sachs to buy protection on layers of Abacus capital structure.

• Hence, Paulson had an economic incentive to select RMBS that it expected to experience credit events in the future.


(3)

• These details were not advised to investors.• Further:

– VP Fabrice Tourre mislead investors by indicating the Pauson had invested $200m in equity (namely, they expected the fund to grow financially) in Abascus, whereas their interest was the opposite.

– Deal closed on 26 April 2007 & Paulson paid Goldman $15m for structuring & marketing Abacus.

– By October 2007, 83% of portfolio had been down graded & 17% was on negative watch.

– By 29 January 2008, 99% of portfolio had been down graded.


(4)

– Investors lost more than $1b.• The SEC case:

– The SEC is claiming Goldman Sachs made “materially misleading statements and omissions” in its marketing of Abacus to investors, failing to inform them that Paulson’s hedge fund had “played a significant role” in choosing the subprime mortgage-backed securities underlying this CDO and that Paulson had an incentive to pick securities that would probably decline in value.

• ]


(5)

• http://www.youtube.com/watch?v=5bS6UsWKMuk

• http://www.youtube.com/watch?v=n9uipRLT0e4



Credit Default Swaps (CDS’s)

• The synthetic mania was not confined to mortgages and spread to other forms of credit. By far the largest synthetic market is constituted by credit default swaps. Early CDS’s were customised agreements between two banks

– Bank A the swap seller agreed to pay an annual fee for a set period to Bank B , the swap buyer, with respect to a specific portfolio of loans.

– Bank B would commit to making good Bank A’s losses on portfolio defaults


(2)

• In terms of volume:– Nominal value of CDS contract

outstanding is US$42.6 trillion

• By comparison:– US household wealth is $18.5 trillion;

– Capitalisation of US stock market is $18.5 trillion

– US treasuries market is $4.5 trillion.


(3)

• The combination of a bond from a lesser rated company, with a CDS from a bank or insurance company can raise the rating of the bond.

• Hence if we wish to invest in an A rated bond, we have two choices:

– Invest in an A rated company, or

– Invest in a lower rated company which has a supporting CDS from at least an A rated organisation.

• This latter investment combination is termed a synthetic bond.


So what is the problem?

• How valuable is insurance-

– Writers of swaps include:

> unlicensed parties such as credit hedge funds;

> Contracts could be transferred without notification to counterparties.

• So were synthetic bonds of value?

• Could they be marked to market to provide a liquid market?

• If the market value could not be readily determined:

– How could investors deal with values ?;

– How could quarterly profit returns be calculated?


Further

• CDS’s had allegedly been used by hedge funds to scare market investors. The swaps are meant to be a form of insurance, so the higher the price- the more the market thinks it is likely that the seller will be unable to meet its side of the deal (due to pay out probability).

• If you drive up the price of CDS’s as high as possible (1000 bp-in case of Macquarie Bank) you are indicating to the market that there is no trust in the company. This aids shorts!




Structured Investment Vehicles (SIV’s). • Investment banks carried large positions of CDO’s off balance

sheet in structured investment vehicles (SIV’s).– The SIV’s financed their positions by issuing asset backed

commercial paper:> This provided liquidity;> Benefited capital adequacy ratios..

– As the value of CDO’s were questioned, the asset backed commercial paper market dried up, & the investment banks were forced to bail out their SIV’s. Most investment banks took the SIV’s into their balance sheets & were forced to recognise large losses (due in part to low value assets & valuation problems),


(2)

• Banks had to transfer off balance sheet items on balance sheet. They had difficulty in calculating their own exposure to securitised instruments and even greater difficulty in estimating the exposure of their counterparts.

• Hence, they were reluctant to lend to each other, preferring to hoard their liquidity.

• This explains the action of central banks in providing liquidity to the financial system.




Freddie Mac/Fannie Mae

• These GSE’s hold or guarantee almost half of America’s US$11 trillion mortgage market.

• They also facilitated much of the MBS market as investors believed they carried an implicit government guarantee. In fact since 2007, the US government has used Fannie & Freddie to increase mortgage lending to help ameliorate the effects of the sub-prime mortgage crisis.

• Bail out proposal:

– Government to purchase US$100 billion in 10% coupon preferred stocks in the company.

– Government will also provide funding to Fannie & Freddie secured against MBS issued by GSEs & Federal Home Loan Banks.


(2)

• Foreign investors began to question the credibility of Federal Reserve & US Treasury:

– Foreign investors, including more than 60 global central banks, hold over US$ 1,400 billion in securities in US agencies including Fannie Mae & Freddie Mac:

> Chinese investors had US$500b of GSE debt;> Kuwait Investment Authority (6th largest soverign wealth fund) had

recently confirmed soundness;> “ if US government allows Fannie & Freddie to fail without

compensation------ it’s not the end of the world, it is the end of the current financial system”.

• US$100 billion commitment equates to < 2% of US$5.4 trillion GSE portfolio of mortgages and guarantees.


American International Group

• US government has taken 80% ownership of company.

• AIL had massive CDS exposure on its balance sheet-market value of US$62 trillion in face value .

• AIG will pay interest at a steep 8.5 percentage points above the three-month London Interbank Offered Rate, equal to about 11.4 per cent. That gives AIG a big incentive to embark on a massive asset sale programme to pay back the loan quickly.

• Insurance rivals are set to jostle to pick up attractive parts of the AIG empire, assets which include profitable aircraft leasing arm International Lease Finance Corp (ILFC).


Next week’s test

• Incorporates “effectively” tutorial questions from:– Lecture 7-Capital raisings in equity markets.

– Lecture 8- International Equity Markets.

– Lecture 9- US Securities Law.

– Lecture 10- Securitisation.


Tutorial questions (to be discussed in Week 13)1 Define the technique of financial engineering.

2 Define the four interlinked components of the US sub prime financial crisis.

3 In terms of the sub prime crisis:

- What were the contributing factors leading to the growth in the market?

- Discuss the Community Reinvestment Act

- Describe the process of risk layering.

4 Discuss the roles of the following parties in the sub prime housing markets, and comment on whether they may have been a contributing factor to the problem:

- Mortgage originators;

- Mortgage brokers;

- Mortgage insurers.

- Rating agencies.


(2)

5 Explain the effects of rising home loan mortgage rates and the housing market price slowdown on the sub prime mortgage market.

6 Define a collaterised debt obligation;

- What was the linkage between CDO’s and the sub prime housing market?

- How did this linkage contribute to the financial crisis?

7 Define a Credit Default Swap;

8 What was the linkage between CDS’s and the sub prime housing market?

- How did this linkage contribute to the financial crisis?

9 Define a Structured Investment Vehicle.

-What was the linkage between SIV’s and the financial crisis ?

Copyright statement for items made available via MUSO

Copyright © (2008). NOT FOR RESALE. All materials produced for this course of study are reproduced under Part VB of the Copyright Act 1968, or with permission of the copyright owner or under terms of database agreements. These materials are protected by copyright. Monash students are permitted to use these materials for personal study and research only. Use of these materials for any other purposes, including copying or resale, without express permission of the copyright owner, may infringe copyright. The copyright owner may take action against you for infringement

Date post:	21-Nov-2014
Category:	Documents
Upload:	vivian-yuchao-xu
View:	109 times
Download:	1 times

AFF5230 L 11 Sub Prime

Documents