FIN465 SUBJECT SEMESTER 5 DIPLOMA UITM

1. 1
FACULTY BUSINESS AND MANAGEMENT
DIPLOMA IN BANKING STUDIES
INTERNATIONAL BANKING (FIN365)
(SUBPRIME CRISIS)
PREPARED FOR:
NOORDIANA BINTI MOHAMMAD
PREPARED BY:
NO NAME MATRIX NO. CLASS
1. NIK NURATHILAH LIYANA BINTI NIK LI 2019288632 D1 BA1195F
2. NUR ATHIRAH BINTI NORREZAM 2019462368 D1 BA1195F
3. NUR AMIRAH NABILAH BINTI CHE OMAR 2019222686 D1 BA1195F
4. NUR HAFIZA ADYANA BINTI MOHD AZLAN 2019403456 D1 BA1195F
5. WAN NUR FARRAH ADIBAH BINTI
BORHANUDDIN
2019228026 D1 BA1195F

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TABLE OF CONTENT
NO TOPIC PAGE NUMBER
1. EXECUTIVE SUMMARY 3
2. INTRODUCTION 4
3. CHRONOLOGY 5-7
4. CAUSES 8-9
5. EFFECT 10-11
6. SOLUTION 12-13
7. CONCLUSION 14
8. REFERENCE 15

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EXECUTIVE SUMMARY
When the subprime mortgage market collapsed in late 2006, it set off a chain of
economic and financial crises that swept through global financial markets, resulting in a
housing market decline and placing the US economy on the verge of collapse. As a result,
many in the ANC and the executive branch have proposed new government spending plans
and measures that would significantly increase the government's participation in the economy
while doing little to alleviate the financial difficulties that have spread rapidly across virtually
every sector.
The current global debt crisis is the result of difficulties in the US subprime mortgage
sector. Until the end of the millennium, loans were mainly made to creditors with a good
credit history who met the requirements for the registration of state-funded institutions; these
loans are called parallel loans.
Subprime and Alt-A loans, on the other hand, have significantly increased their
market share. Subprime borrowers are those with a poor credit history. Customers with a
good credit history but with strict terms of entering into a sub-contract, such as no proof of
income, are eligible for Alt-A loan.
Many lending institutions that provide housing to homeowners do not keep these
loans in their books; instead, they sell it to issuers, who then offer it to investors as collateral
for fixed income. The process of getting a loan on a fixed income market is known as
securitization. There is a conflict of interest in the securities guarantee system, which has
contributed to the current state of subprime debt.

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INTRODUCTION
Many experts anticipated that the crisis would be restricted within the realm of
mortgage issuers who had overloaded on subprime loans as recently as mid-2007. Near-prime,
non-prime, and second-chance lending are all terms used to describe subprime loans. Making
loans to persons who may have trouble keeping up with their payback schedule. Few would
have imagined that the subprime effect would be as severe as it has been thus far, posing a
serious threat to the economy. While downturns in the mortgage and property markets have
produced economic problems in the past, analysts say this time is different.
Next, Subprime Crisis refers to borrowers or loans with weak credit scores that are
typically given at rates significantly above prime. Due to the poorer credit ratings of
borrowers, subprime lending carries a higher risk and has been linked to financial crises in
the past. In the past, such events have resulted in a credit bottleneck in the banking sector,
causing downturns in the wider economy. This would be the first time that a credit shortage
in the non-banking financial sector has triggered a slump.
As we know, subprime crisis start began in 2007. Losses on US Mortgage-Backed
Securities (MBS) backed by subprime mortgages began to extend to other sectors, including
the syndicated loan market, inter-bank lending market, and commercial paper market. Last
but not least, there are five topic in subprime crisis which are chronology, causes,effect and
solution. We will discuss these four topics on the next page.

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CHRONOLOGY SUBPRIME CRISIS 2
The subprime mortgage crisis arose when banks sold too many mortgages to meet the
secondary market demand for mortgage-backed securities. When property values plummeted
in 2006, defaults occurred. Mutual funds, pension funds, and companies that owned these
derivatives were all exposed to the risk. The subsequent banking and financial crises in 2007
and 2008 resulted in the worst recession since the Great Depression.
Here's a chronology from the first warning indications in 2003 to the housing market's
collapse in late 2006. On February 21, 2003, the first warning about the dangers of mortgage-
backed securities and other derivatives was issued. Warren Buffett wrote to his shareholders
at the time, "In our opinion, derivatives are financial weapons of mass destruction, bearing
hazards that, while presently latent, are potentially fatal."
According to the situation, housing prices had skyrocketed by June 2004. To temper
the overheated market, Federal Reserve Chairman Alan Greenspan began boosting interest
rates. The fed funds rate was raised six times by the Fed in December 2004 and it was hiked
eight times in 2005 by December of that year.
This had the unintended consequence of increasing monthly payments for consumers
with interest-only and other subprime loans depending on the fed funds rate. Many
homeowners who couldn't afford traditional mortgages turned to interest-only loans, which
offered reduced monthly payments. When housing values collapsed, many people discovered
that their properties were no longer worth what they had paid for them. At the same time,
interest rates grew in tandem with the federal funds rate. As a result, these homeowners were
unable to pay their mortgages or sell their properties for a profit. Their only alternative was to
go with the default. Demand slowed as interest rates soared. By March 2005, new house sales
had reached a high of 1,431,000.

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Followed by that, the investors began buying additional Treasury immediately
following Rajan's remark, causing rates to fall. However, they were purchasing more long-
term Treasury with maturities ranging from three to twenty years than short-term bills with
maturities ranging from one month to two years. This meant that the yield on long-term
Treasury notes was declining faster than the yield on short-term Treasury notes.
This meant that investors were putting more money into long-term investments.
Higher demand lowered returns. Why? They predicted a recession within two years. They
want a bigger yield on the 2 year bill than on the 7 year note in order to compensate for the
unfavorable investing climate that they anticipated in 2007. Their timing was impeccable.
Thus at that time, home prices fall for the first time in 11 years on September 25,
2006.According to the National Association of Realtors, the median price of existing home
sales declined from the previous year. This was the greatest drop in 11 years. In August 2006,
the price was $225,000. That was the largest percentage loss than the November 1990
recession's record.
On July 17, 2006, the yield curve reversed dramatically. The 10 year note yielded was
lower than the three-month bill's yield. Prices declined because unsold inventories was 3.9
million, which was greater than the previous year. It would take 7.5 months to sell such
inventory at the present rate of sales per year. That was nearly twice the four-month supply in
2004. However, most economists assumed it simply signaled that the housing market was
cooling. This is due to the fact that interest rates were relatively low, for a 30 year fixed rate
mortgage.
Slowing housing demand cut new house permits by 28% year on year. Furthermore,
new house permits are given around six months before construction is completed and the
mortgage is closed. This means that permits are a good predictor of new house sales. 13
Permits are down, which suggests that new house closings will be down for the following
nine months. Thus, no one recognized how deeply subprime mortgages had penetrated the
stock market and the wider economy at the time. At the time, most analysts believed that if
the Federal Reserve cut interest rates by the summer, the housing downturn would reverse
itself. They were unaware of the extent of the subprime mortgage sector. It had caused a
"perfect storm" of terrible luck.

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Many subprime mortgages were made feasible by interest-only loans. Homeowners
were simply paying interest on their mortgages and never paying down the principle. That
was great until the interest rate increase pushed up monthly payments. Often, the homeowner
was unable to make the payments. As house values began to collapse, many homeowners
discovered that they could no longer afford to sell their properties. Subprime mortgage
debacle.
Following by that, subprime mortgages were bundled into investments as mortgage-
backed securities. As a result, they might be sold to investors. It aided in the spread of the
subprime mortgage disease throughout the global financial community. The bundled
subprime mortgages were sold on the secondary market to investors. Banks would have had
to maintain all mortgages on their books if it did not exist. The housing market, as well as the
broader financial world, is ruled by interest rates. Comprehend how interest rates are
established and the link between Treasury notes and mortgage rates in order to understand
interest rates and their purpose. You should also have a solid grasp of the Federal Reserve
and Treasury notes.
Prior to the crisis, real estate accounted for about 10% of the GDP. 14 When the
market crashed, it reduced the gross domestic product. Although many economists predicted
that the real estate recession would be confined, this was only wishful thinking. Bankers lost
faith in one another when home prices declined. They were hesitant to lend to one another for
fear of receiving mortgage-backed securities as collateral. They were unable to appraise these
assets after property values began to decrease. However, if banks do not lend to one another,
the entire financial system begins to crumble.
Finally, what is the conclusion? Derivatives were overused by banks. They sold far
too many subprime mortgages to keep the derivatives supply flowing. The fundamental
reason of the recession was this. This financial disaster swiftly expanded beyond the bounds
of the property market and into the banking system, bringing down financial behemoths. As a
result, the issue has spread around the world.

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CAUSES OF SUBPRIME CRISIS
Credit rating firms and MBS sponsors are at odds over profits
Under the Investment Company Act of 1940, a trust or issuer of mortgage-backed
bonds may be designated as an investment company and thus be subject to broader
limitations of the Act such as Bethel, Ferrell, and Hutchinson in 2008. The issue fixed income
securities and have four very high ratings from a nationally recognized employee rating
center, may be eligible for exemptions from the Act like S&P, Moodys, and Fitch.
The arrangement stated above has the potential to generate a conflict of interest
between credit rating agencies and MBS trustees who set up trusts or issues and have the
authority to request an exemption from the 1940 Act based on rating firms' criteria. Although
the quarterly revenue from fixed shares increased in the first half of 2001, its quarter revenue
from fixed shares, (including MBS securities) was slightly larger than the corporate mortgage
also including MBS securities, was almost three times more than business securities.
Conflict of interest between the Credit Rating Agencies and the Investment Manager
Mortgage rating firms usually evaluate mortgage-based bonds using the same rating
system as corporate bonds. The continuous flow of active data has shown that business bond
measurement is widely known. It has been around for about a hundred years. Evaluation
agencies are required to publish their ratings.
Credit rating agencies must make public policy terms and conditions of securities
based on purchases public. However, the complexity and transparency of the models used by
rating agencies raises concerns. Perhaps even more important, given the short-term existence
of less than a decade in some debt-based tools, we do not have the same mathematical
confidence in the actual validity of these models as we do in the case of business financing.
Pension funds, hedge funds, and other institutional investors are examples of
institutional investors. Wise investment managers often decide what types of loans are
available for mortgage-supported bonds and how much they cost. Part of the compensation of
these fund managers is determined by how much their portfolio returns from the benchmark.

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Conflict of interest between the Homeowner/Mortgagor and Originator/Lender
This was based on Mian and Sufi case in 2008, which is a relationship between
homeowner and the lender. They reported a sharp increase in the amount of loans sold by
loan holders shortly after leaving non-collateral institutions between 2001 and 2005. They
refer to the aforementioned "cracks" in which credit card makers sell loans as soon as they
are done. presented.
These non-collateral corporations, as noted earlier, bought these financial houses and
evicted investors from mortgage-funded mortgage institutions. As a result, lending to a real
estate agent or lender has increased dramatically.The home developer or lender receives
points and closing fees paid by the homeowner, as well as any premiums earned through the
sale of a loan to an MBS sponsor. Due to the increasing lending rate, home lenders are using
risky lending techniques.
Fraudulent borrowing means borrowing procedures that put the borrower in a bad
financial position. Borrowing from a borrower to repay a loan over and over again at a loan is
a failed borrowing practice. Lack of interest in financing mortgages at the beginning of the
decade led to a sharp decline in the quality of mortgages, leading to a dramatic increase in
debt default.

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EFFECT SUBPRIME CRISIS
Subprime crisis gives the good effect and bad effect to the international banking and
of course to the rest of economy in worldwide. Subprime crisis gives the bad effect when the
bank sold so many of mortgage for fulfil the demand of the mortgage-backed securities
through the secondary market. One of the effects that we can see is, on 2006, when the price
of house fell, it triggered defaults to the economy. On 2007, it ensuing banking crisis and on
2008, it ensuing the financial crisis that produce the worst recession. I will take one of the big
countries in worldwide that ever faced with the Subprime crisis.
At the United State (U.S), we can see the effect of subprime crisis happened clearly.
Housing market in the United State make the central banks in United State give out loans
with the very low of interest rate. It is because the housing price that reduce effect of the
crisis and the counter deflation that happened in the United State. From the amount of interest
rate 6.5% in May on year 2000, become 1.0% in June on year 2003. When this happen,
people will motivate to invest in houses as real estate was marked as a “safe” investment for
future. This low interest that they get will be the incentive for people to remortgage their
house loans through longer repayment periods to reduce the high monthly of repayment of
loan.
The percentage is quite large for the new mortgages which is it called as subprime.
Central bank will focus on the individual that come with the low of credit ratings. It will give
the benefit to the borrower of loans but it will give the bad effect too to the borrower because
the chance of foreclosure and frequent mortgage is high. Effect for the bank is they were
unable to recover the loan amount from the borrower because the amount of the borrower
become huge drastically. It put the considerable pressure on the many banks and the step that
took by Bear Sterns merged with the JP Morgan on March 2008 and with Lehman Brothers
collapsed on the mid of year 2008. It become a mark of important milestones when want to
build up the crisis.
On the other hand, Subprime crisis also effect to the yield curve inverts in United
State. The investors make the option to choose the long-term treasury that matured between
three to twenty years because they will get the more benefit on it. When it happens, the yields
on long-term treasury notes falling faster than the short-term treasury notes. On 2005, the
yield curve of United State Treasury inverted, from 4.39% in 7-year become 4.40%
drastically because of this crisis. To get the one percent is too hard but when this crisis

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happens, it effects to the economic and the banks. Before this, the yield of the long-term
treasury notes falling faster than the short-term treasury notes, but when this crisis was
happened, the yield of long-term treasury notes not rising fast. The investors make smart
decision when they know about the economy and yield curve inverts causing them to make
the choice to prefer the long-term treasury notes that short-term treasury notes. It gives the
bad effect to the bank when the demand of long-term treasury notes higher than short-term
treasury notes, the effect is the bank will get low yield returns.
For the investors, it was good effect because they can get the high return to offset the
difficult of investment environment that they anticipate will occur in 2007. The investors
make the right option on 2005 because on 2007, the subprime mortgage crisis become worth
in United State and it involves all banks around the world. Bankers lost trust in each other at
the same time they afraid to lend to each other because the collateral just only mortgage-
backed and when the home prices fall, the bankers can’t state the value of these assets that be
the collateral.

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SOLUTION OF SUBPRIME CRISIS
As we explained before there are many causes of the subprime crisis, so how they
manage to overcome this crisis? Subprime Crisis refers to borrowers or loans with weak
credit scores that are typically given at rates significantly above prime. Although the
subprime crisis is the biggest financial disaster since the Great Depression, it also presents a
similar chance for reform. Before the Great Depression, there were no long-term mortgages
in the United States. Homeowners took out short-term loans and carried them over, but the
Great Depression's financial climate rendered this untenable. Many borrowers couldn't afford
to extend their mortgages any longer due to bank failures, a 30% decline in housing prices,
and a 25% jobless rate. Faced with this problem, the government and business collaborated to
create creative solutions to reduce evictions and aid the recovery process.
The solutions are The Federal Home Loan Bank System is designed after the Federal
Reserve. A group of real estate appraisers that want to make their profession more
professional. Reforms to bankruptcy law that made it possible for regular people to seek
protection from creditors. The formation of a number of beneficial organisations, including
the Home Owners' Loan Corporation, the Federal Housing Administration, the Federal
Deposit Insurance Corporation, the Securities and Exchange Commission, and the Federal
National Mortgage Association.
The subprime crisis calls for change on a similar scale, including some steps which
are bailout. financial information infrastructure, new institutions are necessary. Bailouts will
be required, even if they are unpopular. Bailouts will, indeed, force payers to foot the bill for
other people's poor financial decisions. However, in many cases, the people who will benefit
from the bailouts made poor judgments because they were uneducated, and greedy lenders
took advantage of their ignorance. It would be cruel and inhumane to abandon the victims
now that the loans have gone bad, further eroding faith in society. Furthermore, it would
imply a willingness to tolerate potentially disastrous systemic consequences.
To avoid or lessen future bubbles, the United States requires a new financial
information infrastructure. This should entail the creation of new risk management markets,
such as a real-estate derivatives market. Investors can now purchase real-estate futures
contracts, but they are not extremely liquid. Other risks, such as livelihood risk, GDP risk,
and so on, should be included in the system. Home equity insurance should be available to

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the general public. The banking sector should provide "continuous-workout mortgages," with
payment schedules that respond to market and personal income fluctuations. The government
should support financial advice in the same way that it subsidises medical advice. At the
moment, higher-income individuals get a tax break when they buy financial advice, but
lower-income people, who may need it the most, don't get anything. The entire subprime
disaster may have been avoided if lower-income people had been provided access to solid
financial counsel before signing subprime loans.
During the Great Depression, the Home Owners' Loan Corporation (HOLC) issued
loans to mortgage lenders and used their existing mortgages as collateral. The HOLC, on the
other hand, stipulated that these mortgages must fulfil specific standards for safe and
responsible lending. A watchdog organisation, similar to the Consumer Product Safety
Commission, is likewise needed in the United States to guarantee that negligent or
exploitative financial institutions do not market unsafe financial products to naive customers.
New risk management retail entities might do for regular borrowers what grain elevators do
for farmers, act as a link between the person and the risk management industry.

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CONCLUSION
We all contain the inception, chronology, causes, impacts, and solution of the
subprime crisis as a summary. The subprime mortgage crisis began in mid-2007, and many
analysts predicted that the problem would be contained to mortgage issuers who had become
overly reliant on subprime lending. Credit rating businesses and mortgage-backed securities
sponsors are at war over earnings, and there is a conflict of interest between credit rating
organizations and investment managers, as well as the homeowner/mortgagor and
originator/lender. One of the numerous repercussions of the subprime crisis on the economy
is the inversion of the yield curve in the United States. And we also talk about the solutions
that the US has come up with to deal with the situation. As mentioned before, the government
and business collaborated to create creative solutions to reduce evictions and aid the recovery
process.
The subprime crisis may be the largest financial disaster to strike the United States
since the Great Depression, but it, like the Depression, presents a chance for change that
might leave the American economy and society in far better shape. As a result, the answer to
the subprime crisis should not be to turn back the clock and penalize technology and markets
that have the potential to decrease risk, promote economic justice, and lay the groundwork for
a more stable and equitable financial system in the future. Better and more liquid markets, not
market contraction, are the answer to market failure.

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REFERENCE
1. Ashcraft, A.B. and T. Schuermann, 2007, Understanding The securitization of
Subprime Mortgage Credit, Federal Reserve Bank of New York paper.
2. Bethel, J.E., A. Ferrell and G. Hu, 2008, Law and Economic Issues in Subprime
Litigation, Harvard Law School paper.
3. Crouhy, M. and S. M. Turnbull, 2008, The Subprime Credit Crisis of 07,
University of Houston paper.
4. 4.file:///C:/Users/Hanizah/Downloads/CausesSubprimeCrisis%20(1).pdf
5. https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp
6. https://www.thebalance.com/subprime-mortgage-crisis-effect-and-timeline-3305745
7. https://www.wowessays.com/free-samples/research-paper-on-the-united-states-
subprime-crisis-and-its-impact-to-the-world/
8. https://www.thebalance.com/the-great-recession-of-2008-explanation-with-dates-
4056832