Question

How did the practice of mortgage securitization contribute to the onset of the 2008 Financial Crisis? Briefly explain (1) what "mortgage securitization" means, (2) why this practice first developed, and (3) why the practice became problematic in the decade prior to the crisis.

Answer 1

Ans 1=The practise of ‘mortgage securitization’ comprises combining different mortgages of similar features in a pool & selling debt securities which draw interest on principal disbursements from the collection of mortgages. Securitization converts illiquid assets of different mortgage loans to marketable securities which can be purchased, sold & traded on the secondary markets.

Ans 2=The invention of new financial vehicles was reasonable as it took products already being developed & turned them into new ones. As financial instruments became more abstract & abstruse, they aided bring about an intense shift in the fundamentals of how financial companies were earning funds. Till the 1990s, the mortgage market operated for persons to fund the purchase of their homes & for a long time this was the chief way in which several banks made monies. Financial companies of all types embraced the technique of increasingly abstract mortgage-linked tools, & they realized that they required to secure more raw mortgages in order to keep doing so

Ans 3=It is usually concurred that the cause of the financial crisis ( 2007) which generated a recession globally was the sudden dip in the unconventional (which comprises subprime and Home Equity Loans) mortgage- backed securities market in America . This dip was caused by a fall in real estate prices & an increase in foreclosures. This generated pressure upon the mortgage-backed security sector wherein huge numbers of bonds based upon non-traditional mortgages were suddenly susceptible to default . bondholders had to raise big amounts of funds to cover the loans they had taken to purchase the bonds, thus generating a liquidity crunch which reverberated worldwide.