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The American Dream or Nightmare

In: Business and Management

Submitted By robinsona
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The American Dream or Nightmare

In my opinion, the subprime mortgage crisis was caused by regulation changes as well as the usage of mark to market accounting method. Regulation changes made it possible for lenders to easily sell off mortgages to financial investors, instead of keeping them on their books until the loan was repaid. By selling off these loans lenders no longer had to carry risky investment giving the perception of company stability. Once sold off, investors combined different mortgage products and selling the cash flow as security.

If it’s not bad enough that risky mortgages are sold as a security, the market which it’s traded in is not regulated and trade freely from investor to investor. With no one monitoring this market; free trading of security filled with bad mortgages and the constant buy and sell of these securities, how can these securities be accurately priced at a market price? If these securities were sold in an open market no one would buy them due to their high risk and probability that borrowers would default. How can you place a market value on a product that no one wants? Without consumer confidence stocks become worthless.

How could things have been done differently to prevent this crisis? A regulation mandating all bankers and lenders to keep subprime loans on their books until it’s repaid. Perhaps if lenders were made to hold on to these loans, it would deter greed that fueled the selling of loans and lowering their risks. Not allowing alternate mortgage products (interest only loans and ARMs) be offered to people with no credit, slow credit or bad credit without providing full disclosure of the products risk and the borrowers explicit understanding. Lastly, holding financial institution responsible for showing poor integrity and a lack of objectivity in their underwriting practices.

http://www.federalreserve.gov/newsevents/speech/Bernanke20070517a.htm http://www.consumeraffairs.com/news04/2008/07/mark_to_market.html http://www.savingtoinvest.com/2008/10/financial-crisis-mark-to-market.html…...

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