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global economic crisis Safari File Edit View History
Bookmarks window Help * \' 85% i- u.s. Mon Jan 22 9 59
20 PM E ng.cengage.com MINDTAP ABDULLALMAHOUDI
(3) Assignment: Chapter 01-An Overview of Financial
Management One of the most discussed topics in finance
recently is the globall economic crisis that is said to have
begun in the 2000s. Your professor instructed your team to
write an article for the college newspaper. Your friend has
written the first draft of the article, which captures the
essence of the global economic crisis. She has left some
important points for you to review and has asked you to
check the summary Which statements belong in the
summary? Check all that apply This process had important
implications: (1) The total risk embedded in the mortgages
did not change: (2) since the risk was spread amongst
several CDOs, it was ditticuvt to assess the risk in each
CDO; and (3) during the process of securitizat
resecuritization, financial institutions earned fees and were
thus encouraged to continue this process. The Global
Economic Crisis Mortgage originators issued mortgages to
home buyers and sold these mortgages to securitizing
firms. These firms bundled these mortgages into poo\'s
and created securities that were backed by the mortgage
payments. A portion of these pools were called tranches,
Groups of tranches werc further com bined and then
divided again into more complex securities called
collateralized debt obligations (CDOs). These secunities
were redivided and recombined to crcate even more
complex securities called Borrowers who met certain
requirements for mortgages, such as minimum income
level relative to the total mortgage amount, could obtain
mortgages that were qua lified to be securitized. Such
mortgages were called These secunities were sold to
investors across the world. If all went well, home buyers
would make their payments and investors would carn their
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returns. However, a series of mortgage defaults led to the
meltdown. Investors who were the indirect lenders to the
home buyers didn\'t receive the expected cash flows, and
on top of that, financial institutions skimmed fees during
the process. In the 2000s, 5pecializod mortgage brokers
were allowed to originate mortgage loans. Earlier mortgage
loan originators were Savings & Loan associations SLs) or
banks. Rating agencies, such as Moody\'s and Standard &
Poor\'s, carned foes from securitizing agencies for
providing ratings for CDOs. The securitizing agencies were
looking for higher ratings for their CDOs, and the rating
agencies were earning fees. This led to a conflict of
interest; thus, ratings did not reflect the true risk involved
in the CDOs, which were backed by mortgages. Mortgage
payments based on short-term interest rates-called
adjustable-rate mortgages (ARMs)-were preferred by
subprime borrowers. Flash Player MC 28,0,0,13 Q3 3.34.1
© 2004-2016 Aclla All nghts reserved. © 2013 Cengage
Learning except as noted. All nghts reserved Graded
Solution
The second and the third statements are correct.
Subprime mortgages means lending to people who have
poor credit history.
Earlier only banks and S&L were mortgage originators.
Ratings agencies had conflict of interest as they received
payments for evaluating their clients. The rating agencies
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overlooked at the underlying risk of the asset.
Borrowers typically prefer fixed rate over adjustable rate to
minimize interest rate risk.

Unformatted Attachment Preview

global economic crisis Safari File Edit View History Bookmarks window Help * \' 85% i- u.s. Mon Jan 22 9 59 20 PM E ng.cengage.com MINDTAP ABDULLALMAHOUDI (3) Assignment: Chapter 01-An Overview of Financial Management One of the most discussed topics in f inance recently is the globall economic crisis that is said to have begun in the 2000s. Your professor instructed your team to write an article for the college newspaper. Your friend has written the first draft of the article, which captures the essence of the global economic crisis. She has left some important points for you to review and has asked you to check the summary Which statements belong in the summary? Check all that apply This process had important implications: (1) The total risk embedded in th e mortgages did not change: (2) since the risk was spread amongst several CDOs, it was ditticuvt to assess the risk in each CDO; and (3) during the process of securitizat resecuritization, financial institutions earned fees and were thus encouraged to continue this process. The Global Economic Crisis Mortgage originators issued mortgages to home buyers and sold these mortgages to securitizing firms. These firms bundled these mortgages into poo \'s and created securities that were backed by the mortgage payments. A portion of these pools were called tranches, Groups of tranches werc further com bined and then divided again into more complex securities called collateralized debt obligations (CDOs). These secunities were redivided and recombined to crcate even m ore complex securities called Borrowers who met certain requirements for mortgages, such as minimum income level relative to the total mortgage amount, could obtain mortgages that were qua lified to be securitized. Such mortgages were called These secuniti es were sold to investors across the world. If all went well, home buyers would make their payments and investors would carn their returns. However, a series of mortgage defaults led to the meltdown. Investors who were the indirect lenders to the home buyers didn\'t receive the expected cash flows, and on top of that, financial institutions skimmed fees during the process. In the 2000s, 5pecializod mortgage brokers were allowed to originate mortgage loans. Earlier mortgage loan originators were Savings & Lo an associations SLs) or banks. Rating agencies, such as Moody \'s and Standard & Poor\'s, carned foes from securitizing agencies for providing ratings for CDOs. The securitizing agencies were looking for higher ratings for their CDOs, and the rating agencies were earning fees. This led to a conflict of interest; thus, ratings did not reflect the true risk involved in the CDOs, which were backed by mortgages. Mortgage payments based on short-term interest rates-called adjustable-rate mortgages (ARMs)-were preferred by subprime borrowers. Flash Player MC 28,0,0,13 Q3 3.34.1 © 2004-2016 Aclla All nghts reserved. © 2013 Cengage Learning except as noted. All nghts reserved Graded Solution The second and the third statements are correct. Subprime mortgages means lending to people who have poor credit history. Earlier only banks and S&L were mortgage originators. Ratings agencies had conflict of interest as they received payments for evaluating their clients. The rating agencies overlooked at the underlying risk of the asset. Borrowers typically prefer fixed rate over adjustable rate to minimize interest rate risk. Name: Description: ...
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