This chapter clearly states the thesis and the aims of this paper. This chapter also indicates the details of the research methods that will be used for this study besides giving a guide to subsequent chapters and sections. The subprime crisis affected the U. S. and European markets and economy. The thesis tends to prove the effects and consequences of the subprime on the United States and the European market and the economy in general. The aim of the study is to find out the causes as well as the effects and consequences of the subprime crisis in the global economy including the United States and the European Union market.
The other aim is to find out how the subprime crisis would have been avoided. The study also indicates the lessons that can be learnt from the subprime crisis. The subprime crisis is a credit crisis that occurred in the year 2007. Subprime are people who apply for mortgages but they are not able to meet the requirements for the prime mortgages rates owing to their poor credit histories such as low credit scores, bankruptcy, criminal records on payment issues and charge offs among other poor credit histories. The subprime mortgages are given to people who do not have assets, jobs or any income.
They are also known as the ninja mortgages. This crisis was initially caused by the subprime mortgage market in the United States. The subprime credit crisis had an effect on the North American, European, Asian and the Australian investors. The crisis caused a halt in the asset backed commercial paper besides causing a default in the collateralized debt obligations – CDOs and liquidity on the special investment vehicles. The crisis also caused problems in the liquid assets of many banks and therefore leading to losses in the leading banks globally from 2007.
The subprime crisis has caused many credit problems in Germany and has therefore lead to failures or taking over of these banks. There are many factors that have contributed to the subprime mortgage credit crisis. Some of these factors include the poor investment management processes, agency problems and poor risk management of the financial institutes among others. The other factors that facilitated in the subprime crisis include the lack of transparency in the mortgages markets and lack of valuation models. The regulators also failed in the understanding of the financial systems changing environment implications.
The characteristic of the subprime crisis of the 2007 was large fractions of subprime mortgages that were introduced in 2006 and 2007. The delinquency rate of the loans had increased within years. The research method that has been used in this study is the analysis of the secondary data. Secondary data is data that has been previously gathered by other sources and therefore the data is usually historical. The common external sources of secondary data include: books, periodicals, government sources, regional publications, media sources and commercial sources.
In this study, there is the use of various secondary data such as periodical such as the journal and articles of other sources. The study also used various books in the discussion of the study as well as government sources in finding out a lot of information about the subprime crisis. Equally, the study used regional publications in finding out information about the subprime crisis. The research methods that have been used of this study include the fact finding which involves collecting information from secondary resources and using the information in making decisions.
The other method that was used is the data mining which involves the use of computers in digging data from various sources to find out information about other products and organizations. This chapter identifies the causes of the subprime crisis. This is in a bid to understand how the subprime crisis affected the U. S. and European markets and economy. In order for people to solve a problem and come to a conclusion, there is need to find the causes of the problem in order to be in a position to solve it. There are many reasons which led to subprime crisis.
Some of the major causes of the subprime crisis among others were the public policy partnership of many companies, government agencies and association that was established in Washington to increase the accessibility of cheap accommodation. This partnership used creative financial systems in the provision of cheap accommodation. This was the largest private-public partnership that was established so that they may govern the subprime markets. The other major cause was the central regulators that have aggressively promoted the quick growth of the use of over-the-counter (OTC) derivatives in the subprime markets.
These federal regulators have also encouraged the use of over-the-counter securities that are provided by many financial organizations. The final main reason of the subprime crisis is the linked clinch between the Securities and the Exchange Commission - SEC and the Financial Accounting Standards Board – FASB of fair value accounting that was being used in the subprime markets. Establishing of affordable housing was one of the major reasons why there was the subprime crisis.
It was the role of the public policy partnership of companies, government agencies and association to build affordable accommodations for the people which included the homes, lobbies and real estates. The partnerships built houses through the legal authorization of the Community Reinvestment Act – CRA. The partnership helped people in the affordable housing by ensuring that the people of the U. S. had access to mortgage loans. This was to encourage people in the U. S. to own houses through the help of the banking industry. This partnership was established after the collapse of the real estates in the 1980s.
The partnership led to the de-capitalization of the saving and loans industry (S&L) which thereafter lead into the falling of the real estate prices in many parts of the U. S. The partnership ensured that they got support from the political environment through many methods such as the Fannie Mae and the Freddie Mac methods. They made the congress to be part of the initiative in creating cheap accommodation for the people of the U. S. Through gaining this support, the local and the national politicians ensured that they supporting the affordable housing initiative.
The politicians provided donations and other aids that were to be used for the establishment of the cheap accommodation to the public. These donations were used for loaning the people so that they could build houses. The banks also ensured that the minor community members who were the subprime were able to obtain credit services that they could use in attaining the affordable housing. By the 21st century, many people were engaged in the process of lending mortgages in order to obtain affordable housing. The government ensured that the people had enough money to buy or build houses by supporting the process through donations and other aids.
The government also ensured this by ensuring that there are policies that ensuring this process. The home builders played an important role in the creation of the cheap housing for the people. They were very active in building new homes in a short span period. There were 2 million units of houses that were built every year by the home builders. There were so many changes especially structural changes that occurred to the housing industry after the establishment of the partnership. There was a 63% increase of home ownership in the U. S. in 1990 and a 69% increase in 2005 which was caused by the largest private-public partnership.