Question

In: Economics

5.   Who do you think should be blamed for the collapse of the MBS market in...

5.   Who do you think should be blamed for the collapse of the MBS market in the 2007-09 crisis? Why? (You need to name three parties that played a role and explain WHY they should be blamed.)

Solutions

Expert Solution

Subprime does not mean “lower than prime.” In fact, it’s just the opposite. Subprime lenders charge rates that are higher than prime, the rate offered to a bank’s most creditworthy customers — sometimes much higher. Subprime borrowers are generally people with poor credit who may have a recent bankruptcy or foreclosure on their record

The Sub prime Mortgage crisis was the Collective creation of the world's central banks, borrowers, lenders, credit rating agencies, underwriters, and creditors
Lenders were the main culprits, issuing loans freely to people who couldn't afford them after the dotcom bubble because of free-flowing money.
Borrowers who never dreamed they could buy a home took out loans they believed they could never afford.
Investment banks, rating firms and hedge funds have all played a part in the subprime mess.
Investors looking for big returns at shockingly low rates purchased mortgage-backed securities, boosting demand for more subprime mortgages.

In other words, during the subprime lending boom, lenders invested a much higher percentage of their income on housing. Many of the borrowers have coaxed them along by lowering lending conditions, refusing to provide loan income documentation, and offering adjustable rate loans with low two-year teaser rates that reset to far higher levels. Eventually, that fueled a flood of foreclosures, causing problems for homeowners, lenders, and eventually taxpayers all of it. And digging out will be no easy task.


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