http://www.aaa3.net/wiki-moodys-ratings/
The subprime mortgage lending
Not everyone in America is well off so it's no surprise that people choose to get subprime loans. Subprime loans bank lending is when people money with bad credit history and no access prime rate loans. "Subprime loans became popular in the 1990s. He had an outstanding debt of thirty-three billion dollars in 1993, increasing to $ 332 million in 2003. In 2006, twenty percent of all mortgages in the United States were considered high-risk mortgages and March 2007 there were an estimated 1.3 billion in subprime mortgages outstanding. "(Hinton) the high-risk mortgage loans high risk is therefore for the lender and the borrower and yet many people still take part in it every year. Almost twenty-five percent of U.S. citizens have a poor record credit and have difficulty trying to get prime mortgage loans. Most subprime loans are classified as subprime loans interest and in 2006 two billion five hundred banks, mortgage companies and other lenders made 1.5 billion dollars in high interest loans. That does not mean that all high interest loans are subprime loans, but I'm sure much to the $ 1.5 billion profit. Many people borrow money from the subprime mortgage lenders end up defaulting on their loans due to falling property values that make the value of their homes less than they should for their mortgages. Most of these houses are then such a foreclosure and foreclosed homes and then return for sale at discount prices that reduces the sales prices of new and second residences. "In 2007 there were a total of 2,203,295 foreclosure notices, auction notices sale, bank foreclosures and default notices recorded "(RealtyTrac) and there are about forty-five thousand executions occur each month, many banks are being forced to declare bankruptcy, while others are "stored cash or investing in things like Treasury securities instead of lending money for business growth and consumer spending. "(Hinton) There are some problems with this, let us suppose that foreclosures are at an eight percent foreclosure and losses Thirty percent are "if you change the foreclosures of eight percent to fifteen percent and increased losses resulting from foreclosure thirty percent to fifty percent then, instead of dividing by 2.8 percent on excess profits of the major financial players will split a 2.3 percent loss. Which means it would be a loss of twenty-seven billion dollars instead of a thirty-three billion dollar profit gains. "(Amerman)" What is wrong with this is that there really was not any stress put on the market, as a recession or a natural disaster such as hurricanes and see what happened, shows that the securitization and credit ratings did not work and the deposit insurance could not have worked well. "(Amerman)
Let's look at what might happen if some of these tensions has been produced. "If there was a recession, say that the implementation a mortgage rate doubles to thirty percent and increases the loss by the exclusion of fifty percent to sixty percent. The amount of loss increases by a factor of five to nearly 154 billion dollars. "(Amerman) Let's see what would happen if interest rates were to rise." Let's say mortgage rates high risk go ten percent to thirteen percent, which means that it increases the rate of foreclosure than fifteen percent to thirty percent and the average loss of foreclosures will be reduced from fifty percent to forty percent. This means that the total loss of twenty-three billion dollars to eighty and one billion dollars. "(Amerman) Lets see what would happen if property values should decline further." Let's say the rate increases exclusion fifteen to twenty percent and foreclosure loss rises from fifty to seventy percent. The total annual losses of $ 105 million. "(Amerman) Finally let us see what would happen if the three were to occur at the same time." If all three impacts at the same time tell us that foreclosure rates ranging from fifteen percent, forty-five percent and foreclosure loss rises one hundred and fifty up to seventy percent. This means that subprime losses increased almost twelve times twenty-seven billion dollars to 315 million dollars. If the actual losses will increase high-risk in six or twelve times and then the whole financial system losses will likely increase by twenty-four or thirty-six times. "Domino (Amerman)" The best way to think about it is striking picture that dominated each other, but not in a straight line. Instead of a picture of a domino domino hitting two hitting four dominos the increase is exponential and is a major cause for concern. "(Amerman) Bear Stearns Companies loses 3.4 billion dollars to the subprime mortgage investments as well as a thirty percent reduction in its share price. Morgan Stanley expects 3.7 billion dollars in losses, but a much more largest reported 9.4 billion dollars in losses for high-risk investments "(Hinton) and a loss of $ 11.5 billion total.
We must face the fact that the market for subprime mortgages collapsed, if not totally collapsed already. Lenders seem to have been hardest hit because of the quantities ridiculous money they have lost and they have no way to unload their loans are becoming devalued due to lack of investors. "For borrowers it may be cheaper to stop paying their mortgage if your home has negative equity. This is because the loan guarantee is more or less gone and if the bank excludes at home and trying to re-sell with negative equity of the bank to lose money. "(Hinton)" The markets are worse when agencies such as Moody's and Standard & Poor's cut its ratings on billions of dollars in related high-risk bonds and collateralized debt obligations. Credit rating firms such as Moody's and Standard & Poor's have been accused of ignoring credit risk and jeopardize its rules for ratings, giving investment grade grade tranches of collateralized debt obligation without adequate testing methods of modeling. "(Hinton) Standard & Poor's says they think the housing crisis will not peak until 2009 and total defaults could reach $ 150 million, but I think it will be much more than that, especially if we enter a recession.
Now we have to do is focus on how we can take steps to try to protect against any loss great potential if a financial crisis should occur even bigger. The first thing to do is to limit the ownership of stocks and bonds, especially in banks and companies mortgage. The second thing to do is see if there is any way to turn a potential economic crisis into an opportunity to make money through research and learning of all investments made. Something you should never do is assume that your broker or financial advisor knows everything and always has your best interests in mind, because at any case, what happens to your money does not really affect him financially. Be sure to do your own research for all your investments, especially now that we are potentially will be in a recession and if you are investing for retirement has to be extremely careful. Investing for retirement is one thing if it gets too risky on investment and not enough in savings. That's when really bad things can happen especially with the economy is in a weakened state. Not only could lose all their retirement money with a market decline, but the cars home, and any other asset. More likely is that a large increase in foreclosures and defaults on mortgages, but hopefully the Fed and the Government can solve problems that the adverse effects of the crisis of subprime mortgages not turn a potential recession into a depression wrong.
Works Cited
Amerman, Daniel R. "The subprime crisis is beginning." University financially March 20, 2008. <http://www.financialsense.com/fsu/editorials/amerman/2008/0320.html.>
Brooks, Rick, and Constance Mitchell Ford. "The United States at high risk." Wall Street Journal. October 11, 2007 <http://online.wsj.com/public/article/SB119205925519455321.html.>
Hinton, Sean, Gosal Darvas, and Sha Irvin. "Loans" subprime ". Wikinvest. April 28, 2008. <http://www.wikinvest.com/concept/Subprime_lending>.
Reuters. "The U.S. subprime crisis will not peak until the year 2009: S & P. CNBC." <http://www.cnbc.com/id/21202780/> October 9, 2007.
"Subprime mortgage crisis." Wikipedia. April 29, 2008 <http://en.wikipedia.org/wiki/2007_Subprime_mortgage_financial_crisis>.
"Sub-prime mortgages in the U.S. housing market." Foreclosure1. April 29, 2008 <http://www.foreclosure1.com/sub-prime-mortgage-lending-in-us-real-estate -market.php>.
"The exclusion of U.S. activity increases 75 percent in 2007." RealtyTrac. January 29, 2008. <http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt=64847>.
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