Question

Part I: Explain how each of the following relate to the financial crisis of 2007–2008 (in the US): Declines in real estate values. Subprime mortgage loans. Mortgage-backed securities.

Answer 1

ANSWER:

A lot of defaults on the home mortgage loans threatened the original lenders but also of any financial institution that had invested in these loans directly or indirectly in the year 2007. lot of these defaults were on the sub prime mortgage loans. now the question arises what are subprime loans and the answer is that the loans given to people with poor credit ratings with a high interest and the banks who had given the loans to these people were backing causing the property market to rise and when these people couldn't pay back the loans , the banks dipped back to their reserve and wrote off these debts as unrecoverable and due to this the banks couldn't give loans to people with higher credit ratings and since almost all of the individuals and businesses are dependent on the loans , this created a problem of lending.

mortgage backed securities are bonds backed by mortgage payments and for this the banks created mortgage loans and then they sold these as bonds by combining hundreds of thousand of these to other big financial companies.

Since the market of properties had risen beyond the normal and there was no payment being made by the people who had purchased houses on these mortgage loans , a decrease in price was inevitable as a correction as when these loans were sold off as bonds to investora , the AIG provided insurance to reduce the risk and the AIG had invested billions of dollars in it and once the buubble bursted , everyone who had invested right from the banks to the insurance companies and other investors, everyone had to face the loss.