Question

In: Finance

4.   How did the mortgage market, the MBS market and subprime MBS market grow over the...

4.   How did the mortgage market, the MBS market and subprime MBS market grow over the past two decades?

Solutions

Expert Solution

In the last two decades mortgage maket and mortgage backed securities have seen a swift upside as well a swift downside.Housing prices increased beyond a general inflation rate in year 2000. This could be attributed to higher rate of household debt and lower rate of savings .It was fueled by low interest rates and large inflows of foreign funds that created easy credit conditions.

Between 1997 to 2001 ,The average rate of an American house increased byb124% .The ratio of median home prices to household income aalmost doubled during these times.Us household debt also grew and it amost doubled during these times. So, Entire appreciation in home prices was built upon thin ice..

This appreciation in the home prices led to Financial institutions havinga large exposure in these markets through Mortgage backed securities which were backed by a false belief that the price of these securities are not going to decline as they were backed by house property and Substandard securities were floated in the market on these beliefs

Then excessive leverage of households and excessive exposure of these financial institutions triggered the great depression of 2008 and the economy collapsed significantly.

Widespread measures were introduced my Federal reserve in these markets after 2008 to curb excess exposure in derivatives markets of real estate and Mortgage backed securities are highly regulated since then. The exposure limits of Financial institutions into such securities were predefined and highly regulated . In this previous decade, Real estate markets havebeen kept considerably in check by these regulatory authorities to avoid any kind of furthur adverse movements in these markets to keep economy in check.


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