The credit crunch faced by the financial institutions has called into a disregard for all securitized debt. In this context, we are mainly concerned about the mortgage bonds that were packed up for the resale. Over the last few years, the mortgage default rate in United States was nearly 1.5% of the total mortgage loans provided. However, it must be noted that not all mortgage debts were defaulted likewise
The mortgage default rate as seen in the case of Fannie Mae and Freddie Mac, were higher than that in the main financial institutions. The main reason for this lay in the loan type and the guarantee system of the mortgage. The reason behind the existence of Fannie Mae and Freddie Mac was the new deal of Roosevelt that intended to have a Federal Government supported and guaranteed lending, which would permit the economy of 1930's spring back to normalcy after the ‘Great Depression’. The New Deal policy supported the construction company to start up again.
However, both the two establishments have now failed, because the defaults rate on low mortgages was just too high. What about the large and main financial institutions? How did they manage to face the situation?
When the larger mortgages went out of the remitting capability of Fannie Mae or Freddie Mac, the banks had to themselves had analyze their repayment potentials and get it covered by their packaged refinance bonds.
If you carefully take a look at the overall lending and mortgage default rate, then at the time when 1.5% is the figure, and both the construction companies failed, then it becomes quite easy to determine that these had amazingly high non-payment rates, whereas another lending had a quite lower default rate.
If, supposedly, the 1.5% default rate is completely applied to the loan providers and the non-Federal guaranteed mortgage, and if we consider that the risk gets covered by the interest rates, then the mortgage bonds would be a really profitable investment.
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Economic recession has engulfed the entire world. Falling share markets and declining industrial growths make up the headlines in newspapers everyday. So, what caused the emergence of the economic recession in the world? In this article, we would discuss about the possible reasons that pushed the world economy towards decline.
The economic recession that looms large worldwide, initially started in US. If we go back a few years, there was a boom in the housing sector of America and this was driving their economy to new heights. Motivated by this, many builders invested money and build houses to make profits. But, as they say…no boom lasts for long. Very soon, the boom ended and house owners were left with a large inventory of homes. This caused the prices of homes to decline from the beginning of summer 2006.
As the house prices started falling in various parts of the United States, refinancing of home loans became more difficult. People were left with loans with quite higher interest rates and huge payment amounts.
Though it appears to be a local problem in America, it is not as simple as it seems to be. The original lender who lend funds to reckless borrowers, found the subprime loans as a very interesting and profitable part of their investment pattern. But, with the decline in the house prices, the lenders now found themselves in a messy circumstance.
These losses slowly affected the bigger corporate as well, as they were all interlinked. Some of the major financial institutions such as Citigroup and Merrill Lynch had to bear huge setbacks due to the losses. Despite the offer of financial help by US Federal Reserve, Bear Sterns, one of the major financial institutions collapsed. This also hit other companies like Merrill Lynch and Lehman Brothers.
With the collapse of the major financial institutes and companies of the United States, the entire world received a wave of shock. America is the largest economy in the world, and an economic recession there, had its subsequent affects throughout the world too. Soon, the stock markets declined, unemployment rate rose, and economic depression became a worldwide concern.
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