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The Occurrence and Reason of Mortgage Crisis
I. The occurrence of mortgage crisis
“Mortgage crisis” took place in the spring of 2006 and swept America, European union and Japan which are the main financial markets of the world.
The real estate industry of USA kept ascending during the 21st century, from 2000 to 2005, the houses prices of many cities of USA kept rising twice or above in these 5 years. The boom of the real estate industry of USA made the credit condition of some loan agencies become worse and lose the income certificate and ability certificate of returning money, and providing the loan to the persons who are running into heavier debt.
The happen of mortgage crisis was aroused from the loans for housing funds provided by the United States to the low income citizens. The so-called “low income citizens” include not only the ones whose income is relatively low, but also the ones who ever had extended repayment for a debt, and who had bankrupt record. The mortgage crisis at this time origins from the United States' redeem for its last credit crunch happened in 2001. The credit crunch happened last time was the American internet "bubble" economy. In order to stimulate the economy, the federal of the United States reduced the interests’ rate to approximate 1% and meanwhile loosened the management and control to the loans provision. The abuse of excessive loans and credit risks etc. derived tools leaded to the deterioration of economy.
2. The reasons of Mortgage Crisis
There are three main reasons of the occurrence of mortgage crisis, those are “securitization”, “leverage effect” as well as “weak control and supervision of the government”. The secondary loans problem was initiated by America's secondary debit and credit strategy. If only the financing institutions just run the extension of loans and always mark it in its capital balanced sheet, it would only become the bad loans record and stayed on the bank's level. Actually, the financial crisis happened in the 1980s in America (the Saving and Loans association problem/S&L problem) and in Japan (the “bubble” economy) were both due to the plummet of the real estate, which made the banks had debts and at last developed into the operational crisis of banks. However, nowadays, seventy percent of the loans relevant to the sub-loans had already been securitized. This situation is very distinct from before. Through the way of securitization, the loans market (indirect financing market) and security market (direct financing market) had form an integration. If the loans market meet problem, it will directly lay impact upon the security market. That is to say, the price reduction of relevant products in the security market will sharpen the problem of the loans market. This is the fundamental of the new typed sub-loans happened in the 21th century and typically speaking, it is the outcome of the loans market risks unlimitedly broadened by the tools of security market.
The first problem of securitization is the asymmetry of message. The obligors/debtors who extend for housing funds and the investors of the securitized products are two different parties, the investors are not so familiar with the actual situation of the obligors, hence, they have to turn to some experts for objective evaluation. The investment rating institutions are the ones who launch objective evaluation. However, these investment rating institutions didn't perform their obligations. The second problem of securitization is the initiated morality risks. The inventors of securitization try to resell the loans combinations to a third party as many as possible and make use of the “leverage effect” to make profits. Along with the expansion of the market, their desires are inflating and become distorted. The third problem of securitization lies in the severe difficulty of negotiation of debts in the cause of securitization implementation. If the banks were the securities possessors, they could be able to utilize series of relative flexible countermeasures to deal with the problem of negotiation according to the changing situation. On the contrary, the investment rating institutions play a most inglorious part in the cause of negotiation. Their reaction to deals is slow, and they even deliberately enhance the credit ratings of the products for investment banks. Hence, they helped intensify the strength of billows and waves in the spread of financing crisis.
The appearance of this sub-loans crisis lied in the multi-securitization for above mentioned situation. After the loans for housing funds were securitized, they become RMBS (Residential Mortgage-Backed Securities). The products with lower investment ratings would be securitized again and become CDO (Collateralized Debt Obligations) and more over, the CDO will be cut apart to be again securitized, and become the 2nd power CDO. From the 2nd power CDO to the 3RD power CDO, the business market have lost its original principle and changed to a desire machine. At the mean time, investment rating institutions will also implant the “leverage effect” mechanism in the above process. In the financial market, the leverage effect will often appear when exterior loans happen, once exterior loans and securitization are bound together, the credit inflation will grow rapidly. Especially when the hedge fund intervene into the process, generally speaking, it will often bear “leverage effect” when investors bought RMBS and CDO, and sometimes, the loans for housing funds will be broadened one thousand times. In such prominent “leverage effect”, once the original loans have loss, the negative impact that brought from the original loss will be too much to evaluate.
We ought to introspect the supervision issue. The government did not perform appropriate supervision to those who have not adequate information source of financial knowledge. This is the so-called Predatory leading, which is often used to criticize the people who get high commission fees and meanwhile repeatedly lend money to other parties; or those sneak the high commission fees and insurance fees into the refunds amounts without the agreement of the borrowers; or those who extend too much credit to the borrowers with lower refund ability. The dispute about the predatory leading in the United States exists for a long history, however, it seems that the dispute on the predatory leading could not make a due affect on this time’s mortgage crisis.
Along with the continuous shrinking on the United State’s real estate industry, the America Federal has a heavier pressure to rise up the interests’ rate. The previous popular mortgage loans gradually fall in crisis. On 13March, 2007, the Mortgage Bankers Association (MBA) of the United States reported that the market of real estate lending funds showed the crisis already. From the residential market index of chart one, we can figure out that the United State's real estate industry is becoming worse and worse.
3. The development trend of mortgage crisis
Currently, the mortgage crisis is more and more widespread. Since the close down of Bear Stearns Cos, more than ten financial institutions announced bankruptcy consecutively, within which, the two American real estate companies --- Fannie Mae and Freddie Mac's bankruptcy are the most well known and they represented a climax of the United State's mortgage crisis. The central government of America had announced that it would help the market. On 30th July, 2008, American President Bush officially signed up the salvation acts (which was already been accepted by the Congress Senate and Boule) to help the United State's real estate industry and economics industry. Bush agreed to pour 1400 billion US dollars to take over Fannie Mae and Freddie Mac. While, the current noble bankruptcy of the America's fourth biggest investment company, Lehman Brothers Holdings and the acquisition of Merrill Lynch by Bank of America pushed mortgage crisis to another climax.
On the other hand, the radiation effect of the United State’s mortgage crisis has been emerging rapidly. Influenced by the slump in the prices of stock in America, the stock markets in Europe and Asia also declined to different extent. At the same time, because of the tardy financing flow globally, the European Union (EU), the United States and Japan's central banks infused huge sums of money to their financial institutions so as to alleviate the cash flow problem and stabilize the loans market.
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