Political Science 2211E Chapter Notes - Chapter Lim: Herd Mentality, Liquidity Risk, Crony Capitalism
22 Jan 2018
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Li(cid:373), (cid:858)old wi(cid:374)e i(cid:374) new bottles: su(cid:271)p(cid:396)i(cid:373)e mo(cid:396)tgage c(cid:396)isis causes a(cid:374)d co(cid:374)se(cid:395)ue(cid:374)(cid:272)es(cid:859) Wall street made billions selling and trading asset-backed securities. Subprime mortgages simply mean lending to house borrowers with weak credit. When these conditions disappeared, the rest to default were subprime borrowers. These defaults caused an implosion of the mortgage backed securities (mbs) and the collateralized debt obligations (cdos) industry. The securitization of housing mortgages into mbs has enabled banks and mortgage companies to increase the velocity and turnover of loans as banks and mortgage companies securitized and sold off these loans. Securitization enabled banks and mortgage companies, the originators of these loans, to take on more loans as they moved the securitized loans off their books. Many large housing developers aggressively pushed mortgages to borrowers in order to boost sales. These new players have neither the credit skills nor the interest to conduct proper due diligence of potential homebuyers.
