" Interest-Only Mortgage Payments and Payment-Option ARMs." " The Financial Crisis Inquiry Report," Pages 451-452.įederal Deposit Insurance Corporation. " The Financial Crisis Inquiry Report," Pages 445-446.Īllen Independent School District. " How Debt Markets Have Malfunctioned in the Crisis,". The contracts required coverage from credit default swaps insurance when the MBS value reached a certain level. It would have wiped out all the largest banking institutions in the world. If the banks were forced to mark their value down, it would have triggered the default clauses of their derivatives contracts. This suspension allowed banks to keep the value of the MBS on their books. Financial Accounting Standards Board eased the mark to market accounting rule. Mark to market inflated the housing bubble and deflated home values during the decline. Now banks needed to lend less to make sure their liabilities weren't greater than their assets. When asset prices fell, the banks had to write down the value of their subprime securities. In their desperation to sell more mortgages, they eased up on credit requirements. They then scrambled to increase the number of loans they made to maintain the balance between assets and liabilities. First, banks raised the value of their mortgage-backed securities as housing costs skyrocketed. The rule forces banks to value their assets at current market conditions. Some experts also blame mark to market accounting for the banks' problems. Those laws would have protected borrowers from taking on mortgages they really couldn't afford. Many lenders spent millions of dollars to lobby state legislatures to relax laws. That's what caused the Savings and Loan Crisis in 1989. They also invested depositors' funds in outside hedge funds. In 1999, the banks were allowed to act like hedge funds. The subprime mortgage crisis was also caused by deregulation. And American International Group (AIG) almost went bankrupt trying to cover the insurance. No one could price, or sell, the now-worthless securities. When they couldn't sell their homes, either, they defaulted. Those with adjustable-rate mortgages couldn't make these higher payments. What could go wrong? Nothing, until the Fed started raising interest rates. They created demand for mortgage-backed securities by pairing them with guarantees called credit default swaps. Hedge funds are always under tremendous pressure to outperform the market.
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