'Cream-Skimming' in Subprime Mortgage Securitizations: Which Subprime Mortgage Loans Were Sold by Depository Institutions Prior to the Crisis of 2007?

2010 ◽  
Author(s):  
Paul Calem ◽  
Christopher Henderson ◽  
Jonathan Liles
Keyword(s):  
Mortgage Loans ◽  
Subprime Mortgage ◽  
Depository Institutions ◽  
Cream Skimming

scholarly journals Profit and Risk under Subprime Mortgage Securitization

2011 ◽  
Vol 2011 ◽  
pp. 1-64 ◽  
Author(s):  
M. A. Petersen ◽  
J. Mukuddem-Petersen ◽  
B. De Waal ◽  
M. C. Senosi ◽  
S. Thomas
Keyword(s):  
Risk Mitigation ◽  
Collateralized Debt Obligations ◽  
Mortgage Loans ◽  
Main Hypothesis ◽  
Subprime Mortgage ◽  
Important Indicator ◽  
Residential Mortgage ◽  
Maturity Mismatch ◽  
Mortgage Securitization ◽  
Collateralized Debt

We investigate the securitization of subprime residential mortgage loans into structured products such as subprime residential mortgage-backed securities (RMBSs) and collateralized debt obligations (CDOs). Our deliberations focus on profit and risk in a discrete-time framework as they are related to RMBSs and RMBS CDOs. In this regard, profit is known to be an important indicator of financial health. With regard to risk, we discuss credit (including counterparty and default), market (including interest rate, price, and liquidity), operational (including house appraisal, valuation, and compensation), tranching (including maturity mismatch and synthetic) and systemic (including maturity transformation) risks. Also, we consider certain aspects of Basel regulation when securitization is taken into account. The main hypothesis of this paper is that the SMC was mainly caused by the intricacy and design of subprime mortgage securitization that led to information (asymmetry, contagion, inefficiency, and loss) problems, valuation opaqueness and ineffective risk mitigation. The aforementioned hypothesis is verified in a theoretical- and numerical-quantitative context and is illustrated via several examples.

VALUATION OF MORTGAGE INSURANCE CONTRACTS WITH COUNTERPARTY DEFAULT RISK: REDUCED-FORM APPROACH

2014 ◽  
Vol 44 (2) ◽  
pp. 303-334 ◽  
Author(s):  
Chia-Chien Chang
Keyword(s):  
Default Risk ◽  
Insurance Companies ◽  
Reduced Form ◽  
Mortgage Loans ◽  
Subprime Mortgage ◽  
Mortgage Insurance ◽  
Insurance Contracts ◽  
Mortgage Crisis ◽  
Correlated Defaults ◽  
Form Approach

AbstractIn the recent subprime mortgage crisis, which has caused banks and insurance companies to go bankrupt or into acquisition, the lender and insurer have exhibited not only correlated defaults when exposed to common risk factors but also counterparty default risk, which is triggered by mortgage defaults. Given the correlated defaults and the counterparty default risk, we use the reduced-form approach to derive the closed-form formulas of mortgage insurance contracts with premium refunds, annual premiums and upfront premiums. Regardless of the nature of the premium structures, the numerical analysis with parameter calibration demonstrates that both the correlated defaults and the counterparty default risk significantly impact mortgage insurance premiums, particularly in long-term mortgage loans.

The unintended emergence of a greed-led economic system

Kybernetes ◽  
2019 ◽  
Vol 48 (2) ◽  
pp. 238-252 ◽  
Author(s):  
Wladimir Andreff
Keyword(s):  
Economic System ◽  
Capital Accumulation ◽  
Economic Modelling ◽  
Mortgage Loans ◽  
Empirical Observation ◽  
Subprime Mortgage ◽  
Content Type ◽  
Regulatory Systems ◽  
Winner Take All ◽  
Formal Rules

Purpose This paper aims to propose a new model of economic behaviour in which activities are led by greed rather than by the traditional formal rules of capitalism. Design/methodology/approach This paper relies on the empirical observation of bad practices that developed in synchrony during the collapse of the former communist economic system and the rise of global financial capitalism. Both were fuelled by greedy behaviour of asset grabbing, and paved the way to an emerging greed-led economic system. Findings First, microeconomic individual greedy behaviours that drive asset grabbing are identified, such as rigged or corrupt privatisation drives, subprime mortgage loans, Ponzi schemes, lending to insolvent clients, bad loan securitisation, stock options, fraudulent accounting and online betting on fixed matches. Then systematic changes in the traditional formal rules of capitalism that favour those having adopted a greedy strategy are pointed at; greedy behaviour is institutionalised when these capture the state and successfully lobby for rules change. Contrary to capitalism, systemic greed uses asset grabbing, instead of capital accumulation, as its major means for wealth maximisation without constraint, in a winner-take-all economy beneficial to oligarchs. Research limitations/implications The implications of this new systemic behaviour have implications for further economic modelling. Practical implications The emergence of systemic greed will have implications for the design of regulatory systems. Originality/value This paper proposes that a greed-controlled economy is replacing the traditional capitalist economy.

scholarly journals Miraculous financial engineering or toxic finance? The genesis of the U.S. subprime mortgage loans crisis and its consequences on the global financial markets and real economy.

2012 ◽  
Vol 1 (3) ◽  
pp. 114-125 ◽  
Author(s):  
Ivo Pezzuto
Keyword(s):  
Credit Risk ◽  
Financial Markets ◽  
Interest Rates ◽  
Housing Prices ◽  
The United States ◽  
Central Banks ◽  
Economic Damage ◽  
Mortgage Loans ◽  
Subprime Mortgage ◽  
The U.S

In the fall of 2008, the U.S. subprime mortgage loans defaults have turned into Wall Street’s biggest crisis since the Great Depression. As hundreds of billions in mortgage-related investments went bad, banks became suspicious of one another’s potential undisclosed credit losses and preferred to reduce their exposure in the interbank markets, thus causing interbank interest rates and credit default swaps increases, a liquidity shortage problem and a worsened credit crunch condition to consumers and businesses. Massive cash injections into money markets and interest rates reductions have been assured by central banks in an attempt to shore up banks and to restore confidence within the financial system. Even Governments have promoted bail-out deal agreements, protections from bankruptcies, recapitalizations and bank nationalizations in order to rescue banks from disastrous bankruptcies. The credit crisis originated in the previous years when the Federal Reserve sharply lowered interest rates (Fed Funds at 1%) to limit the economic damage of the stock market decline due to the 2000 dot.com companies’ crisis. Lower interest rates made mortgage payments cheaper, and the demand for homes began to rise, sending prices up. In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages. As the industry ramped up, the quality of the mortgages went down due to poor credit origination and credit risk assessment. Delinquency and default rates began to rise in 2006 as interest rates rose (Fed Funds at 5,25%) and poor households across the US struggled to pay off their mortgages. Many of them went bankrupt and lost their homes but the pace of lending did not slow. Banks have transformed much of the high-risk mortgage debt (securitizations) into mortgage-backed securities (MBS) and collateralised debt obligations (CDO), and have sold these assets on the financial markets to investment firms and insurance companies around the world, transferring to these investors the rights to the mortgage payments and the related credit risk. With the collapse of the first banks and hedge funds in 2007 the rising number of foreclosures helped speed the fall of housing prices, and the number of prime mortgages in default began to increase. As many CDO products were held on a “mark to market” basis, the paralysis in the credit markets and the collapse of liquidity in these products let to the dramatic write-downs in 2007. When stock markets in the United States, Europe and Asia continued to plunge, leading central banks took the drastic step of a coordinated cut in interest rates and Governments coordinated actions that included taking equity stakes in major banks. This paper written by the Author (on October 7th, 2008) at the rise of these dramatic events, aims to demonstrate, through solid and fact-based assumptions, that this dramatic global financial crisis could have been addressed and managed earlier and better by many of the stakeholders involved in the subprime mortgage lending process such as, banks’ and investment funds management, rating agencies, banking and financial markets supervisory authorities. It also unfortunately demonstrates the corporate social responsibility failure and the moral hazard of many key players involved in this crisis, since a lot of them probably knew quite well what was happening but have preferred not to do anything or to do little and late in order to change the dramatic course of the events.

scholarly journals The Relationship Between Accounting Practices and Effects of Financial Crisis in Turkey: A Case Study on an Oil Company

2016 ◽  
Vol 6 (1) ◽  
pp. 47-58 ◽  
Author(s):  
İsmail Erkan Çelik
Keyword(s):  
Financial Crisis ◽  
Financial Crises ◽  
Negative Effects ◽  
Mortgage Loans ◽  
Financial Reports ◽  
Subprime Mortgage ◽  
Before And After ◽  
Accounting Rules ◽  
The 2008 Financial Crisis ◽  
Audit Reports

Many reasons lie at the base of all financial crises from the past to the present. If we take into consideration the 2008 subprime mortgage crisis, the only reason cannot be mortgage loans. But the mortgage issue continued to advance and created several other problems. Definitely, the source of mortgage loans problem also had many roots. One of the reasons was the lack of correct use of accounting principles and auditing. This is a strong proof and indicator that, there are many accounting based reasons behind the occurrence of the financial crises. Many examples can be given showing moving away from the basic principles of accounting rules and the general accounting concepts. Moreover, institutions being not fully independent, running creative accounting practices, having problems with fair valuation and transparency issues, presenting unreal financial reports, and sharing misleading audit reports are all related to financial crises.Furthermore, specific businesses and people abuse accounting rules, standards and related legislation for the sake of their own interests. Accounting and finance history has shown us that, even audit institutions, credit institutions and rating agencies are getting unfair advantages and generating unethical cash by making intentional accounting and finance errors, which is actually categorized as fraud.The aim of this study is to analyze financial crises and to determine if accounting practices have any relationship with financial crises. The research investigated an oil company’s financial and operational indicators before and after the 2008 financial crises with related tables and figures. Also, an interview was run with the company’s accounting officer. Based on the statements of firm’s accounting officer, correct accounting practices defended firm from several negative effects of the 2008 financial crisis.

scholarly journals Why the Community Reinvestment Act Cannot be Blamed for the Subprime Crisis

2009 ◽  
Vol 8 (3) ◽  
pp. 346-350 ◽  
Author(s):  
Manuel B. Aalbers
Keyword(s):  
Global Financial Crisis ◽  
Community Reinvestment Act ◽  
Subprime Crisis ◽  
Mortgage Loans ◽  
Subprime Mortgage ◽  
Community Reinvestment ◽  
Foreclosure Crisis ◽  
Conservative Media ◽  
The Global Financial Crisis ◽  
The U.S

It has  become common practice—and in particular, but not exclusively, in conservative media—to blame the Community Reinvestment Act (CRA) of 1977 for the U.S. subprime mortgage and foreclosure crisis that triggered the global financial crisis. It is argued that the CRA forced lenders to give mortgage loans to high–risk borrowers. This is nonsense for at least five reasons.

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