By M. Jarsulic
An indepth examine the origins and improvement of the present monetary problem, from an economist and Washington insider. Jarsulic explains how a wide range of monetary associations, together with loan banks, advertisement banks, and funding banks created a credits bubble that supported nonprime loan lending and helped to inflate apartment prices.
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Additional info for Anatomy of a Financial Crisis: A Real Estate Bubble, Runaway Credit Markets, and Regulatory Failure
7 More downgrades of subprime securities followed. The reason for the downgrades was distressingly simple. The pools of mortgages backing the RMBS were not performing as investors or the ratings agencies had anticipated. Higher than expected defaults and foreclosures on mortgages meant that the revenues to RMBS bondholders could easily fall below the levels promised. That meant that the ratings of those bonds, which ref lect the likelihood of loss to the bondholder, had to be adjusted downward.
These triggers require, for example, that the market value of the SIV assets can redeem the senior securities. If this requirement cannot be met, then the SIV assets must be sold and the results distributed to the senior note holders. Both conduits and SIVs require continued access to short-term borrowing. 5 Securitization and Structured Finance Made Many Important Institutions Vulnerable to Losses on Nonprime Lending. CDOs, conduits, SIVs, and associated securitization platforms left banks and investment banks with large exposures to nonprime assets.
Subprime lenders also dramatically lowered the down payment requirements for borrowers, thereby increasing loan-tovalue ratios (LTV). The share of loans at origination with a LTV greater than or equal to 90 percent or with a second lien increased dramatically during the boom, reaching a peak value of nearly 30 percent in 2006. The presence of a second lien usually meant that the borrower took out a second loan to help cover the down payment. More importantly, it often meant that the borrower at origination had no equity in his home.
Anatomy of a Financial Crisis: A Real Estate Bubble, Runaway Credit Markets, and Regulatory Failure by M. Jarsulic