The Role of Mortgage Backed Securities in the Financial Crisis

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Mortgage-backed security or MBS is considered to be the cause of the financial crisis. MBS played a central role in the financial crisis that began in 2007 and wiped out trillions of dollars, lowered Lehman Brothers and shook world financial markets. In essence, MBS allows a bank to move a mortgage from his book by turning it into a guarantee and selling it to investors. When a bank is able to move the mortgage out of those books, it frees up space to get more loan capital. With investors encouraged by the traditional strength of the housing market and ranking on SBM, there is a steady demand for repackaged mortgages.

Looking back, it seems natural that demand for SBM will encourage banks to achieve a decline in creditworthiness to supply more to enthusiastic investors. So the MBS market is starting to see more subprime MBS. With Freddie Mac and Fannie Mae also aggressively supporting the mortgage market, the quality of all mortgage-backed securities declining below their rankings becomes increasingly meaningless. When subprime borrowers start failing to pay, the housing market is tightened and then begins to collapse, even harming even conventional mortgage holders. More and more people are running out of their mortgage and the main asset underlying the SBM market, has fallen sharply.

Many MBS and guaranteed debt obligations (CDOs) based on mortgage collections are highly overvalued. The market for MBSs dries up and losses start to accumulate as institutional and bank investors seek to dismantle bad SBM investments. Credit is also tightened, so many banks and financial institutions are fixated on the verge of bankruptcy.

The US Treasury Department began to intervene by providing a $ 700 billion ($ 700 billion) bailout to reduce the credit crunch, but the Federal Reserve is leading the way to create a market to disassemble or not depend on MBS. The Fed buys directly $ 1.75 trillion in MBSs while the Troubled Asset Relief Program (TARP) injects capital into banks. The financial crisis was overcome, but the total commitment of the government, both implicit and explicit, was far greater than the 700 billion dollar figure as is often reported.

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