Principles of Banking and Finance Essay Example for Free

Principles of Banking and Finance studyWhat does Sub-Prime Crisis style? Sub Prime lending which is also known as near-prime, non-prime and second chance lending, means lending to people who might deport trouble repaying the loan out-of-pocket to income ability or character ratings which previously would not receive been available to them. Credit ratings that might be not favorable to them with the standards answer up initially by m angiotensin-converting enzymetary Institutions slowly dwindle to less strict under-writing of loans. which could also due to an influx of foreign capital making lending easier to these group of people, the investment banks that sold the repack mount up mortgages to the consumers which is unity of the federal agency to fund for capital, and the Housing urban Development of America policy to ensure that its citizens has access to mortgage loans easily. The cheaper sp be-time activity reckon packaged by the Financial Institutions which seems more affordable for the consumer for the first 1 to 5 long time and the thereafter interest group step would cause jumped significantly. The loans here generally referred to mortgage loans. The Crisis started or snowball into what it was in 2007 in my opinion was due to greed.Greed into thinking that the belongings boom would continue in sempiternity so that the borrowers could immediate payment in out more from their current property market valuation, with this cash out in terms of personal loan they could fund or finance their lifestyle be it buying a new property for investment purposes, to flip or for rental. For the luxury in life they choose to admire now, expenditure future money. As the miserliness slowed, jobs are being taken away from corporation in America to other countries which have a cheaper source of overhead expenses and manpower. People are being retrenched then causing them to start defaulting on their loan repayments. A statistic done has shown that the American households do not have any savings save was laden with debt instead. The housing bubble burst, the market does not have that oftentimes capital as it used to have to continue to push property prices up anymore, thus causing the market to slow overall, foreclosures of their properties was happening. Consumers was also unable to obtain a refinancing which they had planned previously to lower their interest rate again when it went up, as financial institutions feel the pinched and controlled its lending. How did the Financial Institutions played a quit in this?In the prehistoric banks have financed their mortgage lending activities through the deposits they receive from their customers. This has confined the substance of mortgage lending they could do. In recent long time, banks have designed a new model where they repackage these mortgages to be sold to the bond markets. This has made it a lot easier to fund additional borrowing from the investors and interest rate w as low. But it has also led to abuses as banks no longer have the incentive to check guardedly the mortgages they issue to the lenders. The failure to check and curb lending in return for the possibility of profit was one of the causes. The first sign of the sub-prime crisis was as early as 2007 when HSBC Finance which is part of the banks north American accessory has to write off 880 million in sub-prime lending. The business has become unsustainable as borrowers started to default. The new model which we have come to know is known either as Mortgaged patronizeed Assets or Collateral Debts Obligations. The repackage mortgages are being sold to the bond markets, before they can be sold, attribute rating agency get out determine and crock up the model a rating.A credit rating for an issuer takes into consideration the issuers credit faithfulness example its ability to pay back a loan, and affects the interest rate applied to the particular security system being issued. These MBS or CDOs as it has come to know are usually marketed to countries which has a surplus in its balance sheet as it was generally known that Asians believe in savings rather than spending future money thus the products were usually marketed in Asia, It is allege that the rating agencies experienced from conflicts of interest, as they were pay by investment banks and other firms that organize and sell these structured securities to investors. If there are not to give favorable ratings to these products they risk the underwriter of these securities to another rating agency. It would be hard to sell these products if they are not being given a rating to begin with. Once they are sold the banks have in a way diverted part of the risk to the consumers. Investors should not rely too heavily on these ratings agencies opinions but instead carry out their own homework in the safeness of debt level as comfortably as others related securities.Probably the opinions of the agencies enable them to get a conclusion, however based on past decade of event, it can only be consider as off base when it comes to the risk of credit event. Investors should try to put themselves in the shoes of the product pushers, asking themselves very important points like, why do you need to sell these products? Do you own any of these products yourself? If it is as good as you mention have the private investors bought and participated a substantial amount of their savings in it? Perhaps there need to be some form of intermediaries whereby no conflict of interest go forth affect their opinion and report of these products. A case study in capital of capital of Singapore itself which has made headlines during this crisis was the minibond saga which was being sold in Singapore by a couple of Financial Institutions. The originator of this series of structured products was the now defunct Lehman Brothers. The Minibond was being illustrated to the local anaesthetic consumer as a bond which is not t he case it is actually a Collateral Debts Obligations. The relationship managers in banks are eager to sell the product because of the high commission and the consumer who are eager to buy because the returns are much higher than the fixed deposit being offered by the banks.An estimated of 500 million Singapore dollars was purchased for the Minibonds by consumers. It stirred a series of conflicts with the Financial Institutions that sold these products, the consumers cried fouled into being mis-sold of it, some of the consumers managed to get back part of their investment and vowed not to touch these structured products ever again. We can take a direct back into the 1990s where one of the policy set up and enforce by the Housing and Urban Development of America, was one of the cause of the sub prime crisis. With the support of the government, HUD has less mortgage restriction requirements on its borrowers. The mandate was that Fannie Mae and Freddie Mac which was regulated by HUD, was to generate up to 8 million more homeowners in America. It was known as the National Homeownership Strategy. No down payment was required, 100% financing for the property was the norm. This was partly possible due to the influx of cheap money in the market, with this cheap money consumers speculated with the market, they kept buying new homes thus the good years of where the appreciation of the property keep going up.Financial Institutions dare to lend due to the market corporate trust that it can only keep going up, borrowers confidence that the market too can only keep going up. A check with HUD official website, on the face of it the US government is still supporting home ownership program without first addressing a enduring income issue. Only with a stable income can a person make regular commitment to his or her housing loan commitment. Kudos to the Singapore government for taking appropriate actions during the last few years when their economy was recovering, the measu res taken to prevent over speculation of the property market in Singapore. Homebuyers with the extra cash were snapping up properties, either for owners occupation or for investment purposes. The government either versed from the Sub-prime crisis or foreseen that if it continues the way it is going, a market cut off might be imminent or the crash will be too fast and hard, no soft landing for the consumers.As they knew that property market have its up and down. Steps was taken, it used to be 90/10. Whereby the buyer have to come up with 10% cash and the remaining 90% can be financed through a financial institutions disregardless of the number of property they currently owned. It was changed to 80/20 master, 20% of which is the owners own cash an 80% through financing. Surprisingly it did not deter the consumers, the market still kept soaring. The next rule implemented was the 80/20 rule for first time buyers, meaning buyers without any current mortgage loan, for buyers with an e xisting mortgage which was not yet remunerative up they are only eligible for 60/40. 60% financing for their new property and an increased in the stamp duty to be paid for to the government if it was their 3rd property for Singaporean. The hardest hit was the foreigners who are seeking to invest their money in Singapore properties as they have to pay additional 10% stamp duty which is likely to deter well-nigh of them. Prices still kept going up, the latest ruling was much more complex than the previous few.If one is looking at 80% financing one can only borrow up to the age of 65 years old and tenure of not more than 30 years. Which was not the case previously, in previous scenario it was dependent on different Banks guideline in Singapore, they could lend up to the age of 70, 75 or 80. They stepped in and put a cap at 65 as they believe that is the retirement age. If you want to extend your loan tenure your financing amount will drop to either 60% or 40%. I believe the governme nt did this as they knew that the US is going ahead with decimal Easing 3, they want to prevent too much hot money from landing in Singapore shore.To sum up, we learned from our mistakes and grow not to make the same mistake twice. A healthy economy is based on real economic goods with value. Hopefully US can still continue to take in innovative products like Apple and keep their manufacturing production in US soil, get employment rate up. The citizens have to maintain their expectations in terms of salary wise and spend within their means. Tighten up their way of lending and controlling Banks to a certain extent, a culture that is profit driven but with ethnics. Can heed the investment guru jim rogers advice to focus on farming as there will be a food shortage in time to come. Induce good saving habits in everyone to save up for a rainy day.http//www.ethicalquote.com/docs/SubprimeMortgageCrisis.pdfhttp//news.bbc.co.uk/2/hi/business/7073131.stmhttp//en.wikipedia.org/wiki/Governmen t_policies_and_the_subprime_mortgage_crisis http//www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html http//www.thetruthaboutmortgage.com/mortgages-with-no-money-down/ http//www.telegraph.co.uk/finance/markets/2816291/HSBC-hit-by-sub-prime-crisis.html