Financial Crisis?

Question

Recently the financial markets have virtually frozen up making the issuance of commercial paper and other debt securities difficult to sell. This has forced many mortgage banking companies into bankruptcy. In your opinion, what do you believe to be the major cause of this financial crisis??

Answer 1

Best Answer - Chosen by Voters

I work directly in fixed income corporate finance and first of all, the financial markets have not virtually frozen up and there is still plenty of CP and bonds being sold. The main securities being affected are those held by those specifically in the residential sector, primarily mortgage backed securities and other asset backed securities. Ratings for these companies do not at all affect the credibility of other issuers. The impact on fixed income corporate finance has been minimal at best.

It has mainly been caused by the issuance of subprime mortgages (people with bad credit given terrible mortgages with bad terms) and other adjustable rate mortgages. These loans were made to many different people, not illegal aliens. These mortgages did not have fixed interest rates. When you have an ARM (Adjustable Rate Mortgage) your payment goes up after the teaser rate period ends. Needless to say, many people did not understand their mortgages when they signed up for them and when their payments went up, they were unable to make them which lead to foreclosures.

The lesson to learn, you need to deal with lenders and financial advisors who have the heart of a teacher and will take the time to help you understand. Also, we need to educate ourselves so that we can make decisions on our own that we can trust.

Hope this helps!

Answer 2

Irresponsible lending practices. Lending up to 110% of the purchase price of the assets, lending without down payment, allowing borrowers to have more than a 1/3 of their income going to their mortgage. Crazy loans like short term ARM, interest only loans.
The problem with no down-payment mortgage is that the borrower has no equity into the house. If he cannot pay his mortgage he losses nothing or hardly nothing. It's like renting. Lending practices need to be clean up and lending requirement need to be tighter.