Subprime is defined as some credit which does not meet up major guiding principles that is put in place by financial institutions and particularly those dealing with mortgages. The immense growth in subprime lending is imminently seen in advancing finances to borrowers with meager credit. Reports indicate that in the year 2006 subprime advances increased from nine percent to approximately twenty percent overall in the housing market.
This subprime loans stand relatively high rates of interest to recompense for risk inherent faced by borrowers predominantly those in the mortgage industry. In fact these subprime advances are usually prevalent with risky conditions such as punishments for paying off the advance early that result to expensive refinancing the advance, payments based only on interests and low certification prerequisites that translate to borrowers requiring little official procedure to authenticate some issues; this processes leads to what is termed as liar advances.
(Chris, 2007) Research indicates that the lending market in the United States have greatly increased for the past few years, this market include the Subprime lending market which is said to be offering a number of residential mortgages to the members of the society, in this case we find that the subprime lending has been focusing on particular members of the society who are facing credit risks since they are profound to be excessively put under undue financial burdens.
These mortgage lenders are said to have been working on the improvement of the effectiveness and fair play of the mortgage markets since this market deals with enabling the households who are in need of building wealth, stabilize and to meet all the risks that individuals face on their credits. On of the methods normally used in the implementation of the care to the house holds is securitization which is found to have been used greatly in the United States since it was implemented in the last thirty years.
Many economists are putting into consideration whether this housing slump will bring the economy to the point of failure. The changing market conditions make it difficult for the consumers to rely on the present comparison between the prices of the houses thus giving the current situation the potential to mess with property appraisals. This transaction of the lending market has led to the upsetting of the consumers’ expectations and attitudes towards the purchasing of the houses which leads to the worry of the future increase in house prices. (Olsen, 1969)
We therefore find that the housing industry have been facing negative collision in the balancing of business growth in united states which has caused a drop in the housing industry, this occurs as a result of, over building, high building prices and less credit availability that is present in many lenders. The Subprime situation have caused a negative effect on wealth in many countries due to the rise in prices of the homes which makes the consumers restrain from their spending believing that they are not well off and unable to withdraw their money through the home equity loans.
(Olsen, 1969) It is therefore recorded that many lenders particularly housing finance institutions have formulated some guidelines to limit the increasing surge of foreclosures; for example Washington Mutual are embarking on arrangements of refinancing two billion dollars in subprime advances at lower rates than market rates. Also lenders to the mortgage industry are faced with declining home prices and big advances portfolios having less money which may lead to loss of million dollars in the economy. (Olsen, 1969)
At the moment research indicates that subprime market is facing a crisis which is not at it peak but the U. S economy is faced with a crisis of liquidity as reported by Wall Street journal. This is argued in the sense that most of the subprime advances are not being paid back; this is attributed to investors not supplying funds to the money market thus lenders lack funds to lend out as loans. This means there will be no creation of new businesses because people do not get access to funds. Also recently new guidelines have been introduced and therefore it makes the subprime borrowers no to meet such requirements.
According to the latest research in the United States, subprime housing crisis may not reach climax up to 2009 and it is projected that the totality in defaulting may escalate up to a hundred and fifty billion dollars annually. However, vigorous up-and-coming markets may maintain worldwide growth and expansion strong. Economists projects that the States economic growth by the year 2009 will be slow-moving which may result to an increase rate of joblessness because building of houses is also projected to go down during that period and this has brought about a diverse effect on the U.
S. economy. This has come up as a result of the decline in the governance of financial market by many authorities. The other causing agent for this is the instability of the international finance market. (Chris, 2007) The housing market in the United Sates has been recorded to be weak due to the problems that have been facing the mortgage industry. In this case we find that there have been slump in the confidence that the government had on the Collateralized Debt obligation which include the, associated security, risks and income stream.
The subprime case brought in the idea of enhancing techniques that will fund economic lending by the use of securitization such as collecting mortgages and selling the collateralized debt obligations to the other financial institutions have also contributed immensely to such crisis. This system proved to be of importance to the people enabling them to make a lot of money thus reducing the risk of instability that is always associated with the funding of debts.
This method resulted to a slump in the economy of the United States the reason for this is that the CDOs have always been undisclosing financial losses on various business transactions that do not even recognize the losses they are facing. (Chris, 2007) According to Joshua Rosner of the New York Times he argues that in order to stop the subprime crisis and its effects the Securities and the Exchange Commission need to direct credit evaluation organizations to frequently assess and re-rate debt financial assets.
These rating organizations should be compensated by the issuer and only for preliminary assessments. He also points out that the issue of training and prerequisites for assessments analysts is very crucial in order to generate consistent, viable intentions, transparent and feasible techniques of ratings. The other issue is that of information or data provided for ratings; there have been claims that some of these data are inaccurate and does not reflect the truth. This is according to some of the rating organizations for example Standard and Poor’s Fitch Ratings and Moody’s investors Services.
It is also reported that these rating organizations have embarked on evaluating and lessening ratings particularly in the housing mortgage-backed financial assets. In addition these agencies are practicing the same to pools of advances or credits which are usually known as collateralized debt contracts in order to avert subprime crisis. According to several economists it is still early for both the representatives and the watchdogs to take appropriate actions that will enhance and reinstate investor self-assurance and guarantee that the prospect of such markets is good.
(Fallis 1985) It is also reported that the ratings organizations perform a significant role in the debt markets as compared to that of stock market analysts for example such agencies will require financial institutions, insurance firms and pension administrators to buy debts which are deemed to be of high standard and such quality is based on the guidelines provided by the ratings organizations. These ratings agencies also are unlike arbitrators because they are said to be actively involved in entering in to a deal especially mortgages contracts entered by two or more parties.
These ratings agencies offer advice to issuers of financial securities on how to obtain their preferred assessments. In fact they are reported to be aiding investments financial institutions and hedge finances particularly those with fiduciary contracts or agreements to investors or shareholders to come up with worst probable products e. g. housing products that can obtain commendable ratings when subjected to the ratings agencies. (Fallis 1985)
However it should be noted that this subprime predicament have not been prevented yet and it is basically in front of us. It is also reported that the reduction only stand for undersized portion estimated to be approximately two percent of housing-backed financial instruments as reported in the fiscal year of 2005-2006. Indeed the rating organizations belief that such percentage is still a heap of bad arrears or money obligations held by shareholders that comprise of pension schemes, financial institutions and insurance firms.
In fact the rating organizations principally reduce financial instruments with predictable losses but they do not project the prospect losses. It should also be noted that with the above actions the interest of private, public, and big or small shareholders will be taken care of equitably particularly those dealing in the mortgage industry.
The government through its respective authorities should also play a significant role in order to assist the ratings organizations to avert the subprime crisis which is yet to manifest itself in full swing in the U. S economy. Under this we find that the United States’ government has come up with monetary policies that relate to the housing sector, whereby the government through the central banks provide funds to financial intermediaries for example, banks so that they can offer loans to their customers that they can use for the purchase of houses. (Fallis 1985)
Chris, A. (August, 2007): Economists Brace for Worsening Subprime Crisis. National Public