Mortgage Backed Securities and their role in the economic crisis Essay

Mortgage Backed Securities and their role in the economic crisis - Essay ExampleThis will normally fall to a fall in the countries GDP, a rising and falling of prices because of inflation and deflation and a drying up of liquidity. It normally can take a form of recess or a depression. The economic crisis began with bursting of the united states housing bubble and high default rates on subprime adjustable rate mortgages (ARM),and variable rate mortgages start around 2005 to 2006(Wall Street Journal, December 4, 2007). Prior to the crisis, the government policies and competitive pressures encouraged high risk lending practices for several years. The role of Mortgage Backed Securities in the economic crisis The financial crisis was highly felt in the market in 2008. The civil fraud charges was filed against several major credit rating agencies for their role in developing mortgage bond that helped bring roughly the financial crisis in 2008. The Wall Street Journal reported that the U.S.Securities Exchange Commission (SEC) is currently sounding at the role these companies played in the crisis and exploring the possibility of holding them accountable. The crisis began to affect the financial sector in February 2007, when HSBC, the worlds largest (2008) bank, wrote down its holdings of subprime- connect MBS by $10.5 billion, the first major subprime related loss to be reported. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. Top management has not get away unscathed, as the CEOs of Merrill Lynch and Citigroup resigned within a week of each other. As the crisis deepened, more and more financial firms either merged, or announced that they were negotiating seeking nuclear fusion partners. (Wall Street Journal. Online, May 2008). source risk arises because the borrower has the option of defaulting...This paper outlines the role of the mortgage backed securities (MBS) in the surfacing of financial crisis Mortgage backed securities are loans that are normally purchased from mortgage companies, banks and originators and then assembled into groups by a private entity, a governmental or a quasi governmental. The securities are then offered by the entity. These securities are offered through the securitization, that represents the claims on the principal and interest payments made by borrowers on their loans in the group. Most of the mortgages are offered by a U.S. Government sureness known as the National Mortgage necktie or government-sponsored agencies which comprises of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association Mortgage bonds or mortgage-backed securities were secured by a mortgage on one or more assets. They are generally backed by real retention or real estate holdings. The mortgage bondholder has a claim to the underlying property and can sell it off to compensate for the default if the homeowner give their mortgage defaults.Economic cri sis refer to a situation where the economy of a nation or a country undergoes a sudden downturn which is brought about by financial crisis.The financial crisis was highly felt in the market in 2008 The civil fraud charges was filed against several major credit rating agencies Credit risk arises because borrower has the option of defaulting on the loan one owes. In the real sense, lender is the one who bore the credit risk on the mortgages issued. It was made contingent for lenders to sell the right to receive the payments on mortgages they issue through securitization. This led to several risks in the financial sector