Rating agencies, sub-prime mortgage lenders and investment banks are DEFINITELY the biggest titles at fault. The main reasons have already been covered; rating agencies failed to rate the toxic assets properly, leading investors to make dangerous choices. The toxic assets, according to them were "safe". This clearly states that they did not do their job. The sub-prime mortgage lenders are the root of the problem, as they were the ones who had the guts to start up all the toxic assets to create securities to lend to all kinds of people, responsible and irresponsible. The investment banks then went around and spread it all over the place, and they are the reason why sub-prime mortgage lenders had the motivation to do such a thing in the first place. The homeowners get a pretty small slice (than what I originally intended) even though it was their choice whether or not to buy up the homes, because they lacked reliable sources of investments thanks to the rating agencies (whose piece of the pie will have over 800 calories on it).

Lenders created variations on the adjustable-rate mortgage to attract a growing pool of borrowers, especially homeowners. Adjustable-rate mortgages have interest rates that adjust up or down periodically, with a fixed rate for a period of two to three years. The starter rates are lower than the traditional starter rates, which makes homeownership more affordable and borrowing more easier.

The description of the U.S. Security and Exchange Commission in terms of investors and the market. Used to answer a discussion question.

Asset-backed Security (ABS)

"A security which has a value backed by a pool of underlying assets, such as consumer or commercial receivables. One example is Mortgage-backed security, or MBS."

Source: http://www.hfh.com/hfhweb/GlossaryofTerms/tabid/68/Default.aspx

Define: Collateral Crisis

The crisis occurring as the collateral on a bank's balance sheets is not performing as well as announced. This occurs often with securities when the borrowers are not paying their loans, resulting in the company not having the money recorded on its balance sheets.

The term was found from http://www.skeptically.org/ecodev/id14.html

This is a follow-up to Abdiwahab's question about the role of the SEC.
http://www.sec.gov/about/whatwedo.shtml

The main purpose of the SEC is to protect investors while maintaining good markets. The more compelling objective would be to protect the first-time investors, as they wrote that more and more new investors turn to markets for their future. The SEC makes its rules based on their philosophy that all investors should have access to certain basic facts about an investment prior to buying it, and so long as they hold it (worded exactly as on the site). To achieve this, the SEC forces all public companies to disclose reliable and useful information to the general public, that investors may read over and decide whether or not to turn to a certain company. The SEC looks over the securities around the world, and anything concerning securities exchanges, securities brokers and dealers, investment advisors, and mutual funds to safely guide investors over the world.

It's when investors lose confidence that firms start to fail, since they all withdraw their money at the same time. This goes for Bear Stearns, whose way to 'riches' was through a heavy load of toxic assets, buying out the mortgages, bundles them up and loan them out as securities. These loan offers had attracted many homeowners who were so sure that housing prices would only go up. As stocks started dropping, investors lost confidence in Bear Stearns, dropping out on the stocks. By Thursday, with the reserve almost gone, Bear Stearns had turned to the Federal Reserve Bank for emergency loans that they may open tomorrow. Lots of toxic waste such as hidden subprime mortgage loans were found. Federal Reserve bails out Bear Stearns with emergency loans.

Published March 16, 2008

Published February 19, 2009 Notes - Barack Obama pledges $75 billion to reduce the mortgage payments of homeowners at risk of default - A previous effort by George Bush, whose first plan was to help up to 240,000 subprime borrowers refinance their debts into goverment-backed, fixed-rate mortgages, resulting in only 4000 doing so - A Democrat-inspired plan of $300B to guarantee up to 400k mortgages only attracted 517 applications, since lenders were bugged because they had to first write down the principal - This is an issue of whether homeowners cannot afford to pay, or that they refuse to pay, since now their homes are worth less than their mortgages - Economists divide up their opinions - First school: even in cases of negative equity, most homeowners will not default should they be able to afford the payments - Second school: once the home is worth less than the mortgage, homeowners have a significant incentive to walk away from the payment, since lenders cannot then pursure them for the shortfall - Should negative equity be the real issue, the principal for the loans would have to be reduced, but lenders are reluctant as either the homeowners would choose to default or the investors would sue the lenders - House prices are still falling, so many homeowners are ought to have negative equity again

Published August 31, 2007 Bush moves in to support homeowners from the supprime-mortgage crisis.

From the July 6, 2007 issue of Executive Intellignece Review Notes: July 6, 2007 issue of Executive Intelligence Review -two hedge funds of Bear Stearns had failed, causing the $2.6 trillion CDOs market to nearly freeze up -Mortgage-backed losses caused another hedge fund by Caliber Global Investments -June 22, 2007: Bear Stearns to bail out its two failing hedge funds by extending to them in emergency loans of $1.6-3.2 billion, whose purposes are to prevent the creditors from seizing and selling the assets, and to prevent the failure of the hedge funds to trigger a systematic breakdown of the financial system -the hedge funds were the High Grade Structured Credit Enhanced Leverage Fund (HGSCELF) and the High-Grade Structured Credit Fund (HGSCF) that were invested in really risky CDOs, predominantly invested in subprime mortgages.