The work is about the current subprime and financial crisis in Amerika being the trigger for the following global economic crash/depression since 2008. It answeres the questions on: why did it happen (and finally who is to be blamed for mostly); how it could have been averted; and what has to be done, in the predominant part concerning legislation, to averting such a disaster in the future.
A. Introduction
The question, on the current housing / lending crisis in America, what should we do now?, can only be answered when it is figured out why it got so far; in especially, why existing legislation did not work, what role predatory lending played and how far high finance on the secondary market, with Collateralized Debt Obligations ( CDOs ) and the selling /purchasing of so called high-risk junior tranches played a role, and last not least on this level: how it could have been possible, that almost an avalanche of class actions has been rolling over courts grounded on the alleged breaching of acts that were implemented straight on the experience of The Great Depression of the 1930´s; like Securities Exchange Commissions ( SEC ) Rule 10b-5, having its basis at least in the 1934 Exchange Act
Were "bad" subprime loans that were doomed from the beginning to default, given because of unscrupulous predatory lenders / loan brokers making immoral profits out of extremely high interest rates , so they are to be blamed.
Were states like Georgia (and Mew Mexico, New Jersey) forced, for these predatory lending methods, to implement borrowers protection acts, long before the crisis became vivid, like the 2001 Georgia Fair Lending Act (GFLA), but those efforts were stopped through the intervention of the Feds before the Officer of the Comptroller of the Currency (OCC) who pre-empted those laws as far as it was in conflict with federal banking law , making them that way worthless. Are the Feds and the OCC, and so far United States governmental institutions, to be blamed, for pre-empting laws that could have at least mitigated the effects of the crisis?
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Table of Contents
A) Introduction
B) How could the housing crisis have happen? What solutions can be offered to prevent such a disaster in the future?
I. The Borrowers-Loan Originators Level
1) The loan extension itself
a) underwriting standards and fraud
aa) underwriting
) lowered underwriting standards
) low and no documentation loans
) down-payment requirements; Loan To Value (LTV) and Customer To Value (CLTV) ratio
) value appraisal -automated value appraisal
) automated underwriting
) solution underwriting
bb) fraud
) fraud by borrowers
) fraud by brokers
) solution fraud
) borrowers fraud
) brokers fraud
b) final conclusion underwriting and fraud borrowers lenders - level
2) Adjustable Rate Mortgages (ARMs) and Predatory Lending
a) ARM in general
aa) interest rate cap
) periodic adjustment cap
) lifetime cap
bb) payment cap
b) different kinds of ARMs
aa) hybrid ARMs
bb) payment option ARMs
c) Effects on the borrowers and how ARMs are used by lenders
aa) minimum or limited payment: effect
bb) hybrid ARM
cc) interest only ARM
d) solution ARM-predatory lending, future prevention
aa) introduction
bb) Proposal by Governor Edward M. Gramlich May 24, 2000
cc) Proposal by Michael D. Calhoun President Center for Responsible Lending September 20, 2006
dd) Proposal by Arthur J. Murton Director Division of Insurance and Research Federal Deposit Insurance Corporation (FDIC) April 16, 2008
ee) conclusion ARM lending-crisis / predatory lending; future prevention
II. Governmental Level
1) What has already been done to prevent ongoing foreclosures or at least to mitigate the problem
d) Center for Responsible Lending (CRL) fixed interest rates for ARMs; reduction of principal balances or of the interest rates
b) The American Securitization Forum (ASF) Framework
c) The (Federal Housing Administration) FHASecure Initiative
d) conclusion ASF Framework, FHASecure
2) Further legislation that has been brought on the way; HOPE FOR HOMEOWNERS ACT 2008
a) Introduction
b) The Law
c) concerns
III. The secondary market trading level
1) The process of securitization
2) credit enhancement
3) what went wrong on the secondary market (with due diligence)?
4) The meaning of the secondary market itself and predatory lending (facilitated by the secondary market
c) Final Conclusion
Research Objective and Key Themes
This work examines the origins of the American housing and lending crisis, focusing on the roles of predatory lending, lowered underwriting standards, and complex secondary market instruments, while evaluating proposed legislative solutions to prevent future economic collapses.
- Underwriting standards and mortgage fraud practices
- The impact of Adjustable Rate Mortgages (ARMs) on borrower stability
- Governmental interventions, including the HOPE FOR HOMEOWNERS ACT 2008
- The role of the secondary market and due diligence in securitization
Excerpt from the Book
) Lowered Underwriting Standards
Lenders typically (should) make a loan decision based on four key factors: a borrower’s current income in relation to the amount of the mortgage loan; the borrower’s credit history; the appraised value of the house that secures the mortgage; and the extent of the down payment for the loan.
According to an analysis paper by BasePoint Analytics, underwriting became too closely aligned with the sales and production operations, during the mortgage boom and "the focus was on closing as many loans as possible, without adequate regard for risk management" and "loan volume was the historical yardstick" With other words, loan originators themselves lowered underwriting standards because they set quantity before quality. No wonder that BasePoint comes to the conclusion: "loan quality is also paramount".
Summary of Chapters
I. The Borrowers-Loan Originators Level: This chapter analyzes how irresponsible lending practices, including lowered underwriting standards and fraudulent documentation, directly contributed to the high default rates in subprime mortgages.
II. Governmental Level: This section reviews existing legislative attempts to mitigate the housing crisis and discusses new frameworks such as the ASF and the HOPE FOR HOMEOWNERS ACT 2008.
III. The secondary market trading level: This part examines the process of securitization and how insufficient due diligence in the secondary market allowed risky loans to be packaged and sold to investors.
c) Final Conclusion: The conclusion emphasizes that lenders and fraudulent borrowers must share responsibility for the crisis and warns that harmful lending will persist unless interest rate environments and regulatory oversight are fundamentally changed.
Keywords
Subprime crisis, predatory lending, mortgage fraud, underwriting standards, securitization, Adjustable Rate Mortgages, secondary market, due diligence, housing market, financial regulation, credit enhancement, foreclosure, HOPE FOR HOMEOWNERS ACT, banking law, risk management
Frequently Asked Questions
What is the core subject of this document?
The document provides an economic analysis of the American housing and lending crisis, focusing on the causes of the market crash and potential solutions for the future.
What are the central thematic areas?
The core themes include the failure of loan origination standards, the mechanics of subprime lending, the role of governmental intervention, and the risks associated with the secondary market for securitized mortgages.
What is the primary objective of this work?
The objective is to identify why existing legislation failed to prevent the crisis and to determine what regulatory changes are necessary to stop future predatory lending practices.
Which scientific methods are applied in this research?
The work utilizes a descriptive analysis of mortgage market data, legal reviews of financial regulations, and an evaluation of expert testimonies from organizations such as the FDIC and the Center for Responsible Lending.
What topics are discussed in the main body?
The main body covers the borrower-lender relationship, the mechanics of various Adjustable Rate Mortgages (ARMs), the impact of government housing initiatives, and the complexities of the secondary mortgage market.
Which keywords characterize this study?
Key terms include subprime mortgages, predatory lending, underwriting standards, securitization, housing price appreciation, due diligence, and financial regulation.
How did automated underwriting contribute to the crisis?
The text suggests that automated systems often allowed lenders to ignore traditional debt-to-income ratios, leading to the approval of loans that borrowers could not realistically afford.
What role did the secondary market play in facilitating predatory lending?
The secondary market allowed originators to sell loans for a lump sum, which reduced their incentive to ensure that borrowers would be able to repay their mortgages, effectively transferring the default risk to investors.
Why are standard "watch lists" for brokers considered ineffective?
The author argues that watch lists are slow and reactive because lenders often wait until after fraud has been confirmed to take action, by which time the loans have already been funded.
- Quote paper
- Thomas J. Zierer (Author), 2008, The current housing/lending crisis in America; the trigger for the following global economic crash/ depression since 2008; an economic analysis of what we should do now, Munich, GRIN Verlag, https://www.grin.com/document/124495
