08S7B trailblazers

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I really have no idea what to post, so I shall post my Subprime Mortgage Crisis write-up here.

Economics Report
United States Subprime Mortgage Crisis

Background Information

Subprime lending refers to the practice of making loans to borrowers who are unable to qualify for market interest rates, due to either problems with their credit history (which are essentially information used to determine the borrower’s credit worthiness) or the lack of sufficient proof to show that they have the means to repay the debt.

However, subprime mortgages are very risky for both parties (mortgage lenders and applicants). For applicants, the interest rates are so high that they may sometimes surpass the loan amount itself. For lenders, there is a high probability that the applicants may be unable or unwilling to return the money due to the applicants’ bad credit history and murky financial situations.

Cause of Subprime Mortgage Crisis

The subprime mortgage crisis began in the United States in 2006 when the housing bubble was burst. The US housing bubble is the economic bubble in the US real-estate market. It can be identified by rapid increases in the valuations of real-property until unsustainable levels are reached. This leads to a sharp drop in housing prices, resulting in many owners being left with a mortgage debt higher that the value of the property itself.

In the US economy recession in 2001, the home valuations experienced a drastic increase. This is due to the popular notion that real estates, unlike stocks, do not fall in value and hence will make a good investment. As a result, the mania for home ownership started, subsequently leading to booming home valuations. Many home owners then applied for subprime mortgages, believing that they would be able to refinance at more favourable terms later. Also, many applications for mortgages are made by immigrants trying to invest in a property in the hot housing market. However, in late 2006, housing prices dropped by 3%. Barron’s magazine even predicted that the the national median price of housing will fall by close to 30% in the next three years. Due to the decline of their home values, many home owners are unable to pay the mortgages. As a result, mortgage lenders and financial institutions suffered significant losses.

Impacts of Subprime Mortgage Crisis

Many mortgage lenders, banks and financial companies suffered heavy losses due to mortgage asset devaluation. Major companies around the world, eg Citigroup, Deutsche Bank and HSBC, have also registered heavy loss of billions of dollars. As of 23th January 2008, financial institutions estimated their losses as exceeding US $130 billion.

The subprime mortgage crisis also slows down US economic growth, because banks are now less willing to loan money. Economic growth are driven by business and consumer spending. When lesser loans are granted, consumer spending is threatened. The US economy is robust enough to absorb the impact of the crisis, but many global investors fear that the crisis is merely a symptom of a deeper, lurking problem in the US economy. This has led to a fall in investment in the US.

The subprime mortgage crisis is also likely to affect Singapore in an indirect way. Singapore banks hold a total of $2.6 billion worth of collateralised debt obligations, of which 25% contains exposure to US subprime mortgage. The low levels of exposure of assets held by Singapore may shield us from any direct negative impacts, but we are likely to be suffer from the indirect effects due to our open economy. Many prominent banks in major countries (like Bank of China and Swiss bank) have suffered huge losses. Our economy, being heavily reliant intertwined with the global economy, is thus likely to be impacted.

Bibliography

1. “Sub-prime Crisis will hit Singapore in Indirect Way”. The Straits Times, 25 January 2008.

2.http://www.usatoday.com/money/industries/banking/2007-03-15-subprime-econ-usat_N.htm

3. http://news.bbc.co.uk/2/hi/business/7073131.stm

4. http://www.nytimes.com/2007/08/31/business/worldbusiness/31derivatives.html

5. http://www.citymayors.com/finance/us-subprime.html

6. http://en.wikipedia.org/wiki/United_States_housing_bubble

7. http://en.wikipedia.org/wiki/2007_Subprime_mortgage_financial_crisis


-Xin Yu

posted by xinyu :) @ 8:15 PM