Question.2721 - What lessons can be learned from the subprime mortgage meltdown? Could a similar crisis occur (perhaps in the student loan market) in the future? Were the big banks the only ones responsible? Do you think the fines levied by the government were too much or too little?
Answer Below:
What lessons can be learned from the subprime mortgage meltdown? Subprime mortgages are considered significantly riskier than average (Hull, 2009, p. 3). A price increase draws attention to purchasers, leading to even higher prices. Homeowners were drawn in by initially low loan rates that created the appearance of affordability, which is why millions of Americans faced bankruptcy because they bought houses they could not afford. Another thing we may take away from the subprime mortgage is that debt can be detrimental. Individuals who could not qualify for loans were offered loans with unaffordable installments. Banks and lenders could profit from the surge in loan applications by decreasing limits based on a buyer's creditworthiness, utilizing various strategies such as giving subprime loans with higher interest rates. Could a similar crisis occur (perhaps in the student loan market) in the future? I doubt it will happen again, but you never know. Things are more solid now. Bankers must hold more capital, which means they must be less indebted and have a more substantial financial base. The student loan issue may be worse than anybody anticipated. After home, student debt is the second most generic form of household debt. Private banks often urge students to consolidate their loans, transferring them from the government to a private bank. In exchange, banks would provide higher interest rates with harsher penalties for overdue payments and more convoluted payment schedules. This will hurt the pupils' credit scores. Were the big banks the only ones responsible? The mortgage lenders bear most of the blame for causing these issues. The full extent of the practice breakdown started to come to light in 2013 when the US Department of Justice (DOJ) began settling lawsuits against the central banks. Many of the settlements included detailed statements of fact describing how the subject banks' lending and securitization practices had broken down (Adelson, 2020, p. 64). Hedge funds, banks, and insurance firms triggered the subprime mortgage crisis. Lenders were ultimately responsible for lending money to those with bad credit and a high chance of default. Also, although some homeowners were prudent, others played a hazardous game by purchasing properties they couldn't afford with cheap introductory rates and little down payment. Adjustable mortgage interest rates skyrocketed when the Fed hiked the federal funds rate. As a result, housing prices fell, and borrowers defaulted. Do you think the fines levied by the government were too much or too little? The government's fines were reasonable. The government supplied the required assistance, and they were also able to utilize the monies to pay down debt, assist the local community, and construct more stables and bans. The sanctions were imposed to draw the attention of the banking sector to the fact that it needed to be policed internally. Reference: Adelson, M. (2020). The Mortgage Meltdown and the Failure of Investor Protection. Journal of Structured Finance, 26(1), 63-86. https://doi.org/10.3905/jsf.2020.1.095Links to an external site. Brigham, E. F. & Ehrhardt, M. C. (2024). Financial management: Theory and practice (17th ed.). South-Western College Publishing Hull, J. C. (2009). The credit crunch of 2007: what went wrong? Why? What lessons can be learned? The Journal of Credit Risk, 5(2), 3-18. https://portal.lib.fit.edu/login?url=https://www.proquest.com/scholarly-journals/credit-crunch-2007-what-went-wrong-why-lessons/docview/274658310/se-2More Articles From Management
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