Secondary mortgage loan

In 2007 April, America New Century Financial Corporation filed for bankruptcy, marking the formal outbreak of the sub-prime crisis. In this crisis, forming a "Butterfly" effect, the international financial turmoil triggered, causing global downtown crash. The subprime mortgage crisis is American bad debts of $460000000000, due to the bad USA securitization of financial institutions, through the hype, now spread to the whole world, spread to the financial institutions and banks in many countries, estimate the final loss to reach $1.2 trillion, the loss and harm are gradually revealed.

The content and features, subprime loans

Secondary housing loans as subprime mortgage, a mortgage real estate mortgage loan. American mortgage real estate is divided into three grade market, the first level is the subprime mortgage market, the second level is the subprime mortgage market, the third level is the subprime market. Property buyers mortgage policy for low-income very attractive, because it has three characteristics: one is the low Shoufu, some subprime or no down payment, which is particularly attractive for low - income persons. General mortgage loans have Shoufu, probably accounted for 20% of the total to 40%, while the subprime loan down payment is aroused people's desire to purchase. Two is the loan period longer, some 20 years loans, repayment period to lenders to small pressure. The three is the subprime mortgage interest rates after the former high-low, namely 2 years ago is cheap, after 18 years is high, the more close to 20 years when the higher the interest rate. These three features make the low income earners to purchase loans, real estate prices rose rapidly, a house up to millions of dollars more than^[1].

USA offer subprime loans intention is good, in order to solve the difficult problem of low-income people buy a house. Starting this measure, American private housing rate improved by 6 percentage points, the solution to the housing problems of low-income persons for 10000000. In America, child after the age of 18 basic self-reliance, leaving parents constitute a small family. Subprime lending policies to American habit, and satisfy the desire to purchase american. But the law of supply and demand of the market economy is not violated, the loan has stimulated the housing market, the housing market also destroyed. Because at that time America's soaring real estate prices, credit, both sides have a psychological bottom line, namely the last is impossible to sell a house loan, but also lost, the results just in the inside out, house prices have fallen by 40%, the real estate market therefore be utterly routed, led to the outbreak of the subprime mortgage crisis.

The subprime mortgage crisis and the subprime mortgage crisis by, namely "subprime mortgage loan". Subprime mortgages are a high risk, high income industry. The difference with the traditional sense of the standard mortgage is subprime mortgages, the demand is not high credit and repayment ability of borrowers, lending rates corresponding to the mortgage is much higher than the general. The credit record is not good or repayment ability is weak and the bank refused to provide quality mortgage loans, will apply for the purchase of housing secondary mortgage.

When house prices are higher, the subprime mortgage Business Flourishes. Even if the borrower cash flow is insufficient to repay the loan, they can obtain loans to fill the gap by the property value. But when prices are flat or falling, there will be funding gap and the formation of bad debts.

Secondary mortgage loan is a type of foreign housing mortgage, loans to no income or personal credit record low person. The loans to these people, because lenders can charge higher than the good credit rating mortgage mortgage interest. When prices rise, because the value of the collateral is sufficient, problem loans will not; but a fall in house prices, the value of the collateral mortgage people no longer sufficient, income is not high, faces a loan default, the house was repossessed situation, causing the mortgage provider of bad debts increase, the system risk mortgage provider failures increase, financial markets increased.

But the high returns have a big premise, is America prices rising. Rising prices, hot property market, although the subprime mortgage default rate is relatively high, but lenders even loans gone, it also can mortgage the house to recover, sell not earned, because the hot property market, prices continue to rise.

How the crisis happened? Is the beginning of 2006, USA began to turn around the property market, housing prices began to fall, property buyers to the housing or through the sale of mortgage financing. Even if lenders that money does not come back, mortgage the house to collect, sell must make up for the loss of the loaned out. Then, the bonds, is not worth the money, because it is associated with loans do not come back. Before buying these bonds are institutions, will follow the losses. Many investment banks, hedge funds have bought these bonds or is composed of these bond portfolios, so a lot of losses. For example, a series of events including:

In February 13, 2007 America New Century Financial Corporation (New Century Finance) issued in 2006 fourth quarter profit warning.

HSBC Holdings increased $1800000000 allowance for bad debts in the US subprime mortgage business.

Face from the $17400000000 Wall Street Dun, as America second subprime mortgage companies -- new century financial (New Century Financial Corp) announced that filed for bankruptcy protection, shed 54% of its staff in April 2nd.

In August 2nd, the German Industrial Bank announced a profit warning, later showed a loss of 8200000000 euros (this figure is really huge), because its a size of 12700000000 euros as "Rhine LAN fund" (Rhineland Funding) as well as the bank itself less involved in American real estate subprime mortgage market was a great business loss. The Bundesbank convened to discuss the national inter-bank rescue basket German Industrial Bank plan.

American tenth big mortgage agencies -- American Home Mortgage Investment Corp in August 6th filed for bankruptcy court protection, become the New Century Financial Corporation, a USA large mortgage lenders filed for bankruptcy.

In August 8th, American's fifth largest investment bank Bell Sten announced the closure of its two funds, the same reason is due to the subprime mortgage crisis.

In August 9th, France's largest bank the Bank of Paris announced the freezing of its three funds, because of the same investment America subprime bonds have suffered huge losses. The move led European stock markets tumbled.

In August 13th, Japan's second largest bank Mizuho bank's parent company, Mizuho Financial Group announced American subprime losses related to 600000000 yen. Japan, South Korea banks have USA subprime mortgage losses. It is estimated the Japan Inc UBS Securities, Japan nine banks to hold America subprime mortgage-backed securities has more than one trillion yen. In addition, five Korean banks including Woori, a total investment of $565000000 in the collateralized debt obligation (CDO). Investors worry that USA subprime problems will have a strong impact on the global financial market. But Japanese analysts are convinced that the Japanese banks invest in CDOs for the vast majority of the highest credit rating, sub loan crisis is limited.

Later flowering group also announced in July, subprime induced loss of $700000000, but for a profit of $20000000000 in financial group, this is only a small number.

But the turmoil caused by sub loan crisis, has seriously affected countries liquidity. Simply put, in the foreground of the subprime problem of unknown circumstances, the banks to tighten credit, avoid lending between banks, which led to short-term interbank interest rates rose dismantling, in other words, we do not want to put the money out, because other banks are not clear because the subprime losses will be, the financial situation, so the industry had raised interest rates dismantling. That in turn, interbank interest rates are high, resulting in substantial increase in financing costs, so even the banks are reluctant to borrow money from other banks. So liquidity is reduced greatly, this is a great risk, have a great impact on domestic industries need development funding. The Federal Reserve, the European Central Bank, the Bank of Japan, a sudden see the current liquidity crunch, so the market for emergency injection of huge amounts of money. Central banks have pumped more than $three hundred billion, in a few days the market is, announced the availability of inter-bank offered rate than the market low unlimited loans to banks, so they can put the interbank rate down. But such a move, will further show that the severity of the subprime crisis to financial markets. For example, the Fed and the European Central Bank to inject huge amounts of money to maintain market liquidity, is for the first time since the 9 / 11 terrorist attacks. Whether the further expansion of the crisis, will see the end of the bank loan how much the loss^[2]. The following is the subprime mortgage crisis events^[3]:

In 2007 April, the nation's second largest subprime lender - New Century Financial filed for bankruptcy protection, become America largest real estate downturn of a mortgage lender in bankruptcy.

In June, USA's fifth largest investment bank Bell Sten, two of its funds, came as a result of exposure to the subprime mortgage bond market has bad news.

In July, the S & P and Moodie two credit rating agencies were reduced by 612 and 399 kinds of mortgage loan bond credit rating.

In August, in order to prevent American subprime mortgage market crisis caused serious turmoil in financial markets, the Federal Reserve, the European Central Bank, the Bank of Japan and the Reserve Bank of Australia and the injection of funds into the market.

In September, Britain's fifth largest mortgage lender Innocent Roque bank, because of USA subprime mortgage crisis financing difficulty, the bank suffered a run trend.

In October, Merrill Lynch financial report, the third quarter due to the subprime mortgage related areas suffer from about $8000000000 in losses. Merrill Lynch CEO Stan ONeil subsequently resigned.

In November, Abu Zabi investment management the sovereign fund will invest 7500000000 dollars to buy a 4.9% stake in Citigroup, Citigroup subprime events hit.

In December, USA said the Ministry of finance, America government has with the mortgage agencies freezing part of mortgage rates to reach agreement, more than about 2000000 of the borrower's "initial" interest rates are expected to be frozen for 5 years.

In December, American, Europe, England, Canada, Switzerland's central bank announced, will join forces to the short-term lending market capital, to ease the global credit crunch.

The subprime mortgage crisis is essentially a credit crisis, excessive credit expansion led to imbalance and disorder of credit valuation. The last century 90's, USA information industry revolution led to American economic growth too fast, a few years to rise in this economic cycle has reached 12 years, excessive investment in the Internet economy bubble, in 2001 America economy emerged, Greenspan had to cope with the cut, the counter cyclical monetary policy, lower interest rates and the easing of credit, cut interest rates for the 10 time, in 2004, down to 1%. However, the evolved into a global financial turmoil and instability, it is not only a low interest rate America and loose monetary supply, a product of the world but we present international financial system defects.

It is in easing monetary policy, the Fed has no scruples, led to the excessive expansion of bank credit, the evaluation according to the normal risks should not obtain mortgage loans of the so-called "subprime" and "secondary" customer has become the target of banks sell loans. But these people also dream houseSoaring can bring high profits.

Between 2001 and 2005, the developed country houseIt has been on the rise, rose to nearly one times, value $30, an average annual increase of 15%. Some city America West Coast real estatePrices rose by 50% in the year of 2005. This will stimulate a lot of people beyond their ability to pay to purchase loans. And the loan to more people,PricesThe more bullish.

However, by 2006, the situation changed. The Fed started 17 consecutive increases in interest rates in 2004 June, when rates soared to 5.25%, owing on the loan burden makes many people cannot continue owing on the loan, "secondary" loan customers a large number of bankruptcy^[4].

Reason two, subprime mortgage crisis

Only a short while ago, housing loans is a serious matter. Mortgage providers require borrowers to have enough income to pay a large amount of the first payment. From the beginning of 2002, in the double whammy of technology stocks fell and the "9 · 11" event, the Fed began to cut interest rates, the move makes the low income families can afford a mortgage loan, only this event to the housing market opened a huge space for development. In addition to a series of financial innovation and finally opened the blocking flood gates.

First of all, the asset securitization market door opened by. Previously, to provide mortgage loans to banks to mortgage loans as a high-quality assets held to maturity to earn the spread between the huge monthly payment and bank capital cost. After entering the era of asset securitization, the situation began to change. Asset securitization for banks to provide more mortgage funds, so as to obtain mortgage loans more easily. And this prompted banks continue to reduce mortgage lending standards, some originally considered credit low income families into the mortgage market, asset securitization finally opened by the markets.

Secondly, credit insurance credit Bottleneck Breakthrough success. Due to sub-prime borrowers generally for low-income families, so even if the mortgages and then issued securities, also because of these securities are not up to the investment rating and difficult to sell. Therefore, the Wall Street is a financial innovation, credit insurance. Hedge fund or investment bank on the securitization of loans secured by credit insurance. This innovation is unusually effective. Low interest rates, securitization and credit insurance has created a powerful business flow. By 2004, the mortgage bank

It has changed the traditional understanding. The original intention of the mortgage loans are held to maturity banks now easily through asset securitization in a few weeks time I sold them out. In the past five years, 80% of the mortgage loans through securitization of assets were sold.

Once again, the strength of many institutions to enter the hunt the secondary mortgage market. Along with the time according to the market's door was opened, in addition to America bank outside, again according to the number of providers of loans increased. Due to the transaction process design becomes more important than the credit analysis, some new game player began to enter the market. In American domestic, non bank super large companies to enter the market, such as America Ge Corp. In American abroad, HSBC, they quickly in the USA established by market department and at any price they eat market share. At this time, is also the birth of the landmark high-speed mortgage providers, such as the New Century Financial Corporation (now going bust). With tens of thousands of independent mortgage brokers signed a contract to produce large amounts of mortgage products. Packaged in this side, the traditional game player such as Fannie Mae and Freddie Mac Fannie Mae Freddie Mac was more aggressive investment banks such as Bell Sten and Merrill Lynch to squeeze out.

Fourth, excess liquidity makes the secondary mortgage market almost crazy. The global capital poured into American housing market liquidity, the rising prices has brought tremendous pressure. Wall Street knows, rising house prices will hinder the rapid development of the market. Therefore, the Wall Street financial engineers again to design a solution -- frenzied lending. The so-called crazy lending refers to some mortgage payment was exempted from payment, some mortgage basis is actually the borrower fill their false income, the mortgage loan amount and even greater than the total price, the degree of this remarkable crazy. In short, lending standards will cease to exist except in name. In 2006 by the housing mortgage loans ratio as high as 94%, in other words, an average of only 6% of the first payment ratio.

Fifth, fraud and malfeasance to the already crazy time according to the market add fuel to the flames. Another crazy lending is liar loans. Liar loans involve a lot of deception. The first is the agent and the borrower to provide false information and submit to the Century Co such as mortgage providers. Mortgage lenders to the obvious fraud is turning a blind eye, because they can immediately hands to transfer to the packager. Packing the obvious fraud is also open one eye closed, because they can immediately put these loans into bonds, then sold to the European and Asian pension funds. This is a series of fraud and malfeasance. According to a recent survey, 60% of the declaration of income is at least exaggerated 50%.

Sixth, the official connivance of the sub-prime bubble blow the greater. American Congressional Hispanic and black board core members charged by the large sum of money lenders, their views are certainly tend to secondary mortgage market^[5].

The subprime mortgage crisis is caused by the American financial crisis, subprime mortgageReal estateA variety of market loans, and itReal estateThere is correlation between financial. The emergence of the sub-prime crisis andReal estateMarket bubble is directly related to. If to sort out the relationship between them, can be found at firstReal estateThe subprime mortgage crisis, subprime loans by the userReal estateMortgage loan to buy a house, with the external macro economic environment changes, the rise in interest rates that some people can not repay the loan, resulting in the emergence of the sub-prime crisis, fell sharply and then lead to the mortgage backed bond market value, resulting in this kind of financial assets has shrunk dramatically, and then further affect the stock market, other financial assets dropped substantially, causes the stock market crisis, which triggered the crisis in capital markets, this is mainly because in America many investment is a package of assets investment, once an asset assessment of risk adjustment, a price adjustment this part of the assets in the market will be substantially reduced, holding financial institutions this asset class with this type of asset prices plunge, its accounting statements will be reflected, once lost will use from gold to fill, once appear more liabilities than assets, but can't borrow the money they may lead to the failure of a financial institution, which further cause the financial system at this time of crisis, governments out to rescue the market, or the capital or to buy a large number of non-performing assets of financial institutions, this background Next, the financial market crisis began mass diffusion, in the real economy began to shrink, consumers are pessimistic about the expected future income and the originalReal estateDeclines in asset values, so that consumption began to decrease, the entire economy will enter the contraction, or even recession. This in turn will makeReal estateThe market into a deeper crisis. Therefore AmericaReal estateThe price is still in the process of decline.

The real estate market bubble and the financial policy USA error has a direct close contact. The causes of the real estate market bubble America macro-control failures and the Federal Reserve interest rate adjustment is not appropriate, the collapse is directly caused America subprime mortgage crisis, and eventually evolved into the entire financial system crisis. So the sub-prime crisis on condition that the real estate bubble burst, prices fall.
Real estate bubble is excess liquidity. Real estate bubble is a serious departure from the price speculation induced and value, in the transaction process in continuous suddenly increased, prices deviate from the value, the price is much higher than the value, when prices are filled up and does not reflect the price of the monetary value of the bubble. Real estate prices to unsustainable levels on the rise, prices will inevitably occur, as if the bubble burst, so-called "bubble economy". Bubble economy of the two: a serious imbalance of demand and supply, real estate demand is far greater than the real estate supply and demand; atmosphere very strong speculative transactions. The real estate bubble burst, prices will fall to less than the actual value of the real estate amplitude.

Why the real estate bubble? Popular to say that the economic life of too much money, when the money as capital, capital is profit, in a low interest rate policy led to increased demand for real estate, have rich return investment in real estate, these too much money is invested in the real estate market. According to the economics theory called "excess liquidity". The so-called excess liquidity refers to the excessive money supply, the excess money looking to invest, so there is investment in real estate and other industries, the real estate market, excess liquidity in the real estate market, the real estate supply unchanged, the supply of financial transactions and growth speed on the real estate supply growth rate, will lead to the real estate market liquidity surplus^[6].

Not in the real estate bubble burst or housing prices circumstances, the subprime crisis will happen? House prices in the circumstances, the lender will try various devices to mortgage loans, if do not have money to mortgage loans, the lender can also through the second-hand housing intermediary refinancing simply to mortgage the house to recover, and sell them to, not only Shoufu not loss, not to lose. For example: the housing mortgage mortgage loans 1000000 of a house, Shoufu 20% (200000), 800000 mortgage, such as the real estate bubble does not burst, prices rise, the current price of 1100000. According to a normal human judgment, subprime loans to customers in this case poor will also present price 1100000 but only 800000 of the mortgage. It is not through the second-hand housing conduit company to mortgage the house to recover, sell, also can earn 100000 (at current prices 1100000 - 200000 down payment plus the second-hand housing conduit company temporary borrow 800000).

So the sub-prime crisis on condition that the real estate bubble burst, prices fell, but can not be completely attributed to government regulation of financial institutions and to inadequate regulation of derivatives financial loss.