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The subprime mortgage financial crisis, which has yet to be resolved, is the sharp rise in foreclosures in the subprime mortgage market that began in the United States in 2006 and became a global financial crisis in July 2007. Rising interest rates increased the monthly payments on newly-popular adjustable rate mortgages and property values suffered declines from the demise of the United States housing bubble, leaving home owners unable to meet financial commitments and lenders without a means to recoup their losses. Many observers believe this has resulted in a severe credit crunch, threatening the solvency of a number of marginal private banks and other financial institutions. The sharp rise in foreclosures after the housing bubble caused several major subprime mortgage lenders, such as New Century Financial Corporation, to shut down or file for bankruptcy, with some accused of actively encouraging fraudulent income inflation on loan applications. This led to the collapse of stock prices for many in the subprime mortgage industry, and drops in stock prices of some large lenders like Countrywide Financial. This has been associated with declines in stock markets worldwide, several hedge funds becoming worthless, coordinated national bank interventions, contractions of retail profits, and bankruptcy of several mortgage lenders. Observers of the meltdown have cast blame widely. Some, like Senate Banking, Housing, and Urban Affairs Committee chairman Chris Dodd of Connecticut, have highlighted the predatory lending practices of subprime lenders and the lack of effective government oversight. Others have charged mortgage brokers with steering borrowers to unaffordable loans even though lenders offered these borrowers programs that found them acceptable risks, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the portfolios. Borrowers have also been criticized for over-stating their incomes on loan applications  and entering into loan agreements they could not meet.  Some subprime lending practices have also raised concerns about mortgage discrimination on the basis of race. The effects of the meltdown spread beyond housing and disrupted global financial markets (see financial contagion and systemic risk) as investors, largely deregulated foreign and domestic hedge funds, were forced to re-evaluate the risks they were taking and consumers lost the ability to finance further consumer spending, causing increased volatility in the fixed income, equity, and derivative markets.
000 properties in the year-ago period and 34% higher than the 333. subprime mortgages was estimated at $1. Subprime. declining home prices have made re-financing more difficult. The estimated value of subprime adjustable-rate mortages (ARM) resetting at higher interest rates is U. (ARM) are 90-days into default or in foreclosure proceedings as of October 2007. roughly triple the rate of 2005. is not the same as "Alt-A". alt-A and subprime loans. A total of nearly 447.5 million first-lien subprime mortgages Approximately 16% of subprime loans with adjustable rate mortgages outstanding. The value of U. The risks related to the inability of homeowners to make their mortgage payments have been distributed broadly. This is nearly double the 223. credit risk is now shared more broadly.000 U. the risk of default (called credit risk) would be assumed by the bank originating the loan. because Alt-A loans qualify for the "A-rating" by Moody's or other rating firms. including those with prime. Dollars in the European financial markets. bad credit history. Reset activity is expected to increase to a monthly peak in March 2008 of nearly $100 billion.The impact on the economy of this American problem was also felt in Europe. where the European Central Bank tried to control the crisis by injecting over 205 billion U. with a series of consequential impacts. before declining. and investors.S. Understanding the causes and risks of the subprime crisis The reasons for this crisis are varied and complex. This is because the rights to these mortgage payments have been repackaged into a variety of complex investment securities. Subprime loans or mortgages are risky for both creditors and debtors because of the combination of high interest rates.000 in the prior quarter.S. $400 billion for 2007 and $500 billion for 2008. Further. and rising adjustable mortgage rates.3 trillion as of March 2007. mortgage incentives. Understanding and managing the ripple effect through the world-wide economy is a critical challenge for governments.S. Background information Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history or the ability to prove that they have enough income to support the monthly payment on the loan for which they are applying. generally 2 . due to innovations in securitization. However.S. and murky financial situations often associated with subprime applicants. businesses. The crisis can be described as stemming from the inability of homeowners to make their mortgage payments due to a variety of factors such as poor judgment by either the borrower or the lender. due to innovations in securitization. A subprime loan is one that is offered at an interest rate higher than A-paper loans due to the increased risk. with over 7. Traditionally. albeit for an "alternative" means. homes were targeted by some sort of foreclosure activity from July to September 2007. therefore.
which are the rights to receive the mortgage payments) to these SPE. Companies value their mortgage assets (receivables) based on estimates of collections from homeowners. Understanding the impact on corporations and investors Average investors and corporations face a variety of risks due to the inability of mortgage holders to pay. To manage their risk. called special-purpose entities (SPE). increasing their bad debt reserves and reducing earnings. is a repacking of existing debt. A related risk involves the commercial paper market. the MBS investor has the right to cash flows related to the mortgage payments. However. Companies and SPE called special investment vehicles (SIV) often obtain short-term loans by issuing commercial paper.. The SPE then sells the MBS to the investors. Investors provide cash in exchange for the commercial paper. because of concerns regarding the value of the mortgage asset collateral linked to subprime and Alt-A loans. 2007 dropped by 25%. These vary by legal entity. which become collateral in the event of default.e.. collateral ratings. If the risk is not legally contained within an SPE or otherwise. The amount of commercial paper issued as of October 18. These banks effectively sell the mortgage assets (i. third-party investors receive a claim on the mortgage assets. Further. or market values. the interest rate charged by investors to provide loans for commercial paper has increased substantially above historical levels. receiving money-market interest rates. Most CDOs require that a number of tests be satisfied on a periodic basis. to satisfy the terms of the deal. banking receivables. as well. to $888 billion. Alt-A) mortgage homeowners to pay is now in question. often at a steep loss. the entity owning the mortgage collateral may be forced to sell other types of assets. and in recent years MBS collateral has made up a large proportion of issuance.categorized as mortgage-backed securities or collateralized debt obligations (CDO). from the August 8 level. the value of the mortgage asset may be reduced suddenly. For deals with market value tests. essentially. if the valuation falls below certain levels. Companies record expenses in the current period to adjust this valuation. mortgage originators (e. a key source of funds (i. to both assume the risk of default and issue the MBS.g. much like a stock brokerage account margin call. the ability of many companies to issue such paper has been significantly affected. A variety of specific impacts by firm are specified later in the article. Rapid or 3 . Because the ability of sub-prime and lower-quality (e. The mortgage assets in the SPE become the collate ral. liquidity) for many companies. such as tests of interest cash flows. In exchange for purchasing the MBS. banks or mortgage lenders) may also create separate legal entities. A CDO.e. Some general exposures by entity type include: ? Bank corporations: The earnings reported by major banks are adversely affected by defaults on mortgages they issue and retain. pledging mortgage assets or CDO as collateral.g.. In addition. the CDO may be required by its terms to sell collateral in a short period of time..
This helps lenders. loan modification or refinancing). Special purpose entities (SPE): Like corporations. SPE are required to revalue their mortgage assets based on estimates of collection of mortgage payments. or if cash flow falls below contractual levels. First. which is a costly and lengthy process. Investors: The stocks or bonds of the entities above are affected by the lower earnings and uncertainty regarding the valuation of mortgage assets and related payment collection. If this valuation falls below a certain level. Investors have become reluctant to fund such investments and are demanding higher interest rates. Some of the major alternatives. they help provide access to funds for those entities with illiquid mortgage-backed assets. by participant.  Both measures effectively lubricate the financial system. These entities have been affected by mortgage asset devaluation. liquidity).unexpected changes in mortgage asset valuation can lead to volatility in earnings and stock prices. Central banks have also lowered the interest rates charged to member banks (called the discount rate in the U. SPE. in two key ways. These are effectively short-term loans to member banks collateralized by government securities. ? 4 . they have business models with significant reliance on the ability to regularly secure new financing through CDO or commercial paper issuance secured by mortgages. Several major SIV are associated with large banks.) for short-term loans. Other SPE called special investment vehicles (SIV) issue commercial paper and use the proceeds to purchase securitized assets such as CDO. Some lenders have taken action to reach out to homeowners to provide more favorable mortgage terms (i. In addition. This can also cause the rapid sale of assets at unfavorable prices.e. and SIV avoid selling mortgage-backed assets at a steep loss. Specific actions taken by these parties are identified later in the article. The ability of lenders to predict future collections is a complex task subject to a multitude of variables.. Homeowners have also been encouraged to contact their lenders to discuss alternatives. ? ? Understanding strategies for managing the crisis The many parties involved each have a role to play in managing through the current circumstances to limit adverse impacts.S. ? Mortgage lenders and Real Estate Investment Trusts: These entities face similar risks to banks.. investors may have immediate rights to the mortgage asset collateral. Central banks have conducted open market operations to ensure member banks have access to funds (i. include: ? Lenders and homeowners: Both may benefit from avoiding foreclosure.e. Such lenders are at increased risk of significant reductions in book value due to asset sales at unfavorable prices and several have filed bankruptcy.
U. the available funds stimulate the commercial paper market and general economic activity. Regulators and legislators: Laws and regulations can be considered regarding lending practices. credit counseling. in late summer of 2005. The rating processes can be re-examined and improved to encourage greater transparency to the risks involved with complex mortgage-backed securities and the entities that provide them.Second.  Investors lost billions of dollars in securities tied to subprime mortgage assets. Rating agencies have recently begun to aggressively downgrade large amounts of mortgage-backed debt. triggering turmoils in global financial markets.S. Congress also is conducting hearings help identify solutions and apply pressure to the various parties involved. and a surge of foreclosure activity (twice as bad as 2006) and rising interest rates threaten to depress prices further as problems in the subprime markets spread to the near-prime and prime mortgage markets. It can also ensure the top subject material experts are engaged and have a voice to ensure a reasoned debate about the pros and cons of various solutions. Regulations or guidelines can also influence the nature. About $1 trillion of ARMs were to reset in 2007. bankruptcy protection. The booming housing market halted abruptly for many parts of the U. ? ? History ? ? ? ? 1995–2001: Dot-com bubble 2000–2003: Early 2000s recession (exact time varies by country) 2001–2005: United States housing bubble (part of the world housing bubble) 2005–ongoing: Market correction ("bubble bursting") o 2005: Boom ended August 2005.S. tax policies. United States housing bubble (2001–2005) Main article: United States housing bubble 5 . At the same time about $400B of ARMs were reset according to a NY Times report. The plunge in existing-home sales is the steepest since 1989. o 2007: Home sales and prices both continue to fall. The subprime mortgage industry collapsed. Media: The media can help educate the public and parties involved. transparency and regulatory reporting required for the complex legal entities and securities involved in these transactions. affordable housing. Home Construction Index was down over 40% as of mid-August 2006 compared to a year earlier. education. ? Credit rating agencies: Credit rating agencies help evaluate and report on the risk involved with various investment alternatives. o 2006: Substantial market correction. and the licensing and qualifications of lenders.
S.” The impact of booming home valuations on the U. The call linking patriotism to shopping was bipartisan with former President Bill Clinton urging his countrymen to "get out and shop". increasing the risk of a nationwide recession. which began for the U. Problems for home owners with good credit surfaced in mid-2007. a mortgage debt higher than the value of the property. A housing bubble is characterized by rapid increases in the valuations of real property such as housing until unsustainable levels are reached relative to incomes. This bubble is related to the stock market or dot-com bubble of the 1990s. home builders. 6 . New York. was caused by historically low interest rates (meant to soften the blow of the massive collapse of the dot-com bubble). especially in populous areas such as California.There was an economic bubble in many parts of the U.S. Florida. price-to-rent ratios.S. the BosWash megalopolis. and the Southwest markets. and other economic indicators of affordability.. "We had a bubble. 2001 terrorist attacks. and corporations like General Motors producing commercials with the same theme." and concurred with Yale economist Robert Shiller's warning that home prices appear overvalued and that the correction could last years with trillions of dollars of home value being lost. after a market correction. Americans were asked to spend their way out of economic decline with "consumerism. with the exception of the Great Depression.S. cast as the new patriotism". which was caused by a large number of home owners unable to pay the mortgage as their home values declined. In the wake of the subprime mortgage crisis in 2007. but the nation's mortgage markets. Bubbles may be definitively identified only in hindsight..S. which simultaneously allowed people to reduce their monthly mortgage payments with lower interest rates and withdraw equity from their homes as values increased. home supply retail outlets. This in turn is followed by decreases in home prices that can result in many owners holding negative equity. and Wall Street hedge funds held by large institutional investors. and a mania for purchasing houses. poor lending standards.S.. economy since the 2001–2002 recession was an important factor in the recovery because a large component of consumer spending came from the related refinancing boom. Freddie Mac CEO Richard Syron concluded.'s largest mortgage lender Countrywide Financial to warn that a recovery in the housing sector is not expected to occur at least until 2009 because home prices are falling “almost like never before. Role of homeowners Homeowners had been using the increased property value experienced in the housing bubble to refinance their homes with lower interest rates and take out second mortgages against the added value to use the funds for consumer spending. Housing Bubble has a direct impact not only on home valuations. In the early 2000s recession that began in early 2001 and was exacerbated by the September 11. causing the U. The collapse of the U. The real estate bubble in these and other parts of the U. housing market in 2005–2006. housing market from 2001 to 2005.
an estimated one-third of ARM originated between 2004-2006 had "teaser" rates below 4%. Due to securitization. lenders have offered increasingly high risk loan options and incentives to them. In addition to considering higher-risk borrowers. and increase in defaults has left lenders unable to recover losses. Role of lenders A variety of factors have caused lenders to offer an increasing array of higher-risk loans to higher-risk borrowers. Another example is a "payment option" loan. One example is the interest-only adjustable-rate mortgage (ARM). Some subprime lending practices have raised concerns about mortgage discrimination on the basis of race. Additional problems are anticipated in the future from the impending retirement of the baby boomer generation. the House and Senate are both considering bills to regulate lending practices. in which the homeowner can pay a variable amount. home buyers in minority neighborhoods were more likely to get a loan from a subprime lender. The collapse of the housing bubble. 7 . This is a departure from the traditional American approach to homes where "people worked toward paying off the family house so they could hand it down to their children". to 20% in 2006. investor appetite for mortgage-backed securities (MBS). but any interest not paid is added to the principal. Role of regulators Some observers claim that government policy actually encouraged the development of the subprime debacle through legislation like the Community Reinvestment Act. and resultant decline in property values. which then increased significantly after some initial period. Even when median income levels were comparable. In response to a concern that lending was not properly regulated. It is believed a significant portion of the generation are not saving adequately enough for retirement and were planning on using their increased property value as a "piggy bank" or replacement for "a retirement-savings account". which they say forces banks to lend to otherwise uncreditworthy consumers.The housing bubble was largely fed by the lowering of interest rates to record low levels to diminish the blow of the massive collapse of the dot-com bubble. which allows the homeowner to pay just the interest (not principal) during an initial period. As African Americans and other minorities are being disproportionately led to sub-prime mortgages with higher interest rates than their white counterparts. packaged and the risk readily transferred to others. and the tendency of rating agencies to assign investment-grade ratings to MBS. loans with a high risk of default could be originated. The share of subprime mortgages to total originations increased from 9% in 1996. as much as doubling the monthly payment. Further.
Injected $38 billion to lower the effective Federal funds rate.4 billion USD. Role of rating agencies Rating agencies are now under scrutiny for giving investment-grade ratings to securitization transactions holding subprime mortgages. The Federal Reserve further injected $24 billion into the US financial system that day. on top of the €95 billion the ECB had injected on Thursday. who they think may have been conflicted in rating securitization transactions containing subprime mortgages. On 13 August. and the Bank of Japan 8.75% from 6. but critics claim that conflicts of interest were in play. the market-level risks were grossly underestimated.67 billion into the banking system and noted that credit conditions were "normalizing" while the Bank of Japan injected another ¥600 billion. the Federal Reserve cut the discount rate by half a percent to 5. Role of world central banks in stabilization Other central banks around the world have begun coordinated efforts of their own to increase liquidity in their own currencies to stabilize foreign exchange rates (thus stemming a further fall in the American dollar and diminishing any incentive to sell them off) and prevent the probable significant global consequences a run on the American dollar would cause. the European Central Bank (ECB) 191 billion USD. 8 . Smaller amounts have come from the central banks of Australia.25% while leaving the federal funds rate unchanged in an attempt to stabilize financial markets. Injected another $5 billion. 2007. European. Higher ratings are theoretically due to the multiple independent mortgages held in the MBS per the agencies. On August 17. It marks the first time the American.Regulators have turned their attention to rating agencies. A September 5 report by Barclays Capital stated that since the Federal Reserve and European Central Bank had injected funds into their respective financial systems. The European Central Bank (ECB) injected €61 billion. and Canada. As of August 10. 9 August 2007. and the rating agencies failed as a neutral arbiter of risk. Either way. the ECB injected another €47. Injected another $7 to $15 billion. The Fed added $17 billion. 10 August 2007 in order to calm their markets. the United States Federal Reserve (Fed) has injected a combined 43 billion USD. and the Federal Reserve injected $68 billion into their respective banking systems on Friday. Fed injected $30 billion to ensure the effective Federal funds rate trades at the target rate (it had begun to trade significantly above target). and Japanese central banks have taken such actions together since the aftermath of the September 11. 2001 terrorist attacks.
The MGIC-Radian transaction would have been a $4. the Beige Book. the KOSPI dropping about 7% in one day. 9 ." These reserves are temporary loans to banks. On 8 August 2007. Accredited Home Lenders reported on August 10 that the company expected to see up to a $60 million loss for the first quarter 2007. after having already injected billions of dollars over the past weeks. The loans must be repaid within two weeks. a survey compiled by the Federal Reserve about business conditions in different parts of the United States. New York) filed Chapter 11 bankruptcy on August 6. the highest it had been in seven years. "the Federal Reserve added $31. a result of the subprime crisis. Fund/corporate losses Wall Street investment banks and other financial institutions around the world have also been affected. Milwaukee. the Dow had dropped below 13. The LIBOR rate.S. Mortgage Guaranty Insurance Corporation (MGIC.. On September 6. after a layoff of its employees the week before.conditions in the credit market have gotten even worse. with some of the worst-hit industries. with. American Home Mortgage Investment Corporation (AHMI. using securities as collateral. having only the vaguest connection with lending or mortgages. the Dow Jones Industrial Average hit a record high. However. Melville. 2007. the interest rate that banks charge each other rose to 5. not better. The two funds are now essentially worthless. Mortgage lenders  and home builders  fared terribly. Pennsylvania) after suffering a billion-dollar loss of its investment in Credit-Based Asset Servicing and Securitization (C-BASS. On June 20.9 billion deal. 2007. By August 15. Similar drops occurred in virtually every market in the world. with Brazil and Korea being hard-hit. although 2007's largest daily drop by the S&P 500 in the U.72%. for example.  Stock markets On July 19. was in February. concluded that the credit crunch has had a "limited" impact so far on the rest of the economy. such as metals & mining companies.the latest move to keep credit markets from drying up. closing above 14.25 billion in temporary reserves to the US money markets. 2007. New York City). Wisconsin) announced it would discontinue its purchase of Radian Group (Philadelphia.000 and the S&P 500 had crossed into negative territory year-to-date. C-BASS is seeking to restructure its financing.000 for the first time. but losses cut across sectors. Large daily drops became common. Merrill Lynch seized $800 million in assets from two Bear Stearns hedge funds that were involved in securities backed by subprime loans.
 Concerned customers of Northern Rock queuing to withdraw savings from the bank due to fallout from the subprime crisis Rams Home Loans Group. which is the company's largest source of funding for loans. reportedly lost 26% in 2007. Later that same day Thornburg Mortgage.  US and European stock indices continued to fall. Later. suspended redemptions for investors and sold off $312 million worth of assets. its largest one-day decline since the 1987 stock market crash. 10 . Also. which is the largest mortgage lender in the United States. on August 9. A AUD$ 140 million private sector bailout by Westpac was announced on October 2 due to the lender's inability to refinance its loans. the stock of Countrywide Financial. The company said they were unable to sell AUD$ 6.Later. Three days later. on August 13. Thornburg shares fell over 46% in trading on the NYSE. Goldman Sachs' $8 billion Global Alpha hedge fund. announced on August 16 that the company was unable to refinance short-term debt as buyers stayed away from the credit markets. The deal valued Rams at AUD$0.17 billion of extendable commercial paper. the company announced that a group of investors invested more in its Global Equity Opportunities fund by infusing $3 billion after it lost 28% of its total value in one week. Sentinel Management Group. On August 15. an Australian lender. a jumbo mortgage lender. On August 14. on fears that the company could face bankruptcy. Sentinel filed for Chapter 11 bankruptcy protection amid ongoing legal action with respect to this move. French bank BNP Paribas stopped valuing three of its funds and suspended all withdrawals by investors after United States subprime mortgage woes had caused "a complete evaporation of liquidity". announced they were delaying their dividend after facing margin calls and disruptions in funding mortgages in the commercial paper and assetbacked securities markets.40 per share. fell around 13% on the New York Stock Exchange. several media outlets reported that another fund. Rams shares fell as much as 41% on the Australian Stock Exchange. This comes a day after Countrywide said foreclosures and mortgage delinquencies had risen to their highest levels since early 2002. its largest. Citigroup has reported taking $700 million in losses in its credit business in July and August 2007.
R. On September 7.. UBS. Horton. Prem Watsa was raising concerns about securitized products: "We have been concerned for some time about the risks in asset-backed bonds. Asian. a report by the US Labor Department announced that non-farm payrolls fell by 4. Earnings estimates from investment banks such as Lehman Brothers and Morgan Stanley were cut significantly. This is not a small problem. Lehman Brothers. automobile loans or credit card debt (we own no asset-backed bonds). Investors in the fund are unlikely to get any of their money back as the fund falls under the weight of its exposure to subprime credit in the US. The number fell well short of expectations. Concerned customers produced "an estimated £2bn withdrawn in just three days".. Expectations and forecasts As early as the 2003 Annual Report issued by Fairfax Financial Holdings Limited. such as Lennar and D. Basis Capital's "Basis Yield Alpha Fund" applied for bankruptcy protection. The Dow Jones Industrials fell by as much as 180 points on the news. the loss experienced on these loans after securitization will no longer be comparable to that experienced prior to securitization (called a ‘‘moral’’ hazard). which was revised to $8. It seems to us that securitization (or the creation of these asset-backed bonds eliminates the incentive for the originator of the loan to be credit sensitive.4 billion on October 24.On August 29 the Australian Hedge Fund. Cited as a reason for the unexpected weakness in the job market are the problems in the housing and credit markets. Merrill Lynch announced a US$5. With securitization. There is 11 . Homebuilding stocks.  On October 5. particularly bonds that are backed by home equity loans. Deutsche Bank..  Also on October 5 Washington Mutual said that it would take a US$820 million write down in its loans and securities. United States. the dealer (almost) does not care as these loans can be laid off through securitization. Goldman Sachs and Morgan Stanley have lost a total of US$14. British bank Northern Rock applied to the Bank of England for emergency funds caused by liquidity problems. As of October 6.000 in August 2007.. Citigroup. as analysts were expecting payrolls to grow by 110. a sum that credit rating firm Standard & Poor's called "startling". A report on existing home sales released on September 5 said that the number of Americans buying existing homes had dropped by its largest amount since 2001. Bear Stearns. continued to decline. and European stock markets also continued to struggle with the turmoil in the credit markets into early September. when the report first came into existence.000.5 billion loss as a consequence of the subprime crisis.1 billion as a result of the subprime crisis. the first month of negative job growth since August 2003. On September 13. Thus.
As cited above. $1. Nouriel Roubini. The Associated Press described the current climate of the market on August 13. direct loss exposure would likely exceed the $200 billion figure. 2007.$1..0 trillion in asset-backed bonds outstanding as of December 31. Who is buying these bonds? Insurance companies.. a consortium of banks are establishing a fund to prepare for this impact and have committed nearly $100 billion as of October 24th." MarketWatch has cited several economic analysts with Stifel Nicolaus claiming that the problem mortgages are not limited to the subprime niche saying "the rapidly increasing scope and depth of the problems in the mortgage market suggest that the entire sector has plunged into a downward spiral similar to the subprime woes whereby each negative development feeds further deterioration".. 2007. or those funds and investors holding mortgage-backed securities. What happens if we hit an air pocket? Unlike.. 12 . has said that if the economy slips into recession "then you have a systemic banking crisis like we haven't had since the 1930s" .S. a professor at New York University and head of Roubini Global Economics. many such entities have reported significant losses from both revising the valuation of mortage assets and the sale of MBS at steep losses. or approximately $200 billion.. primarily banks. This figure may be increased significantly by "Alt-A" defaults. The impact will continue to fall most directly on homeowners and those retaining mortgage origination risk. as one where investors were waiting for "the next shoe to drop" as problems from "an overheated housing market and an overextended consumer" are "just beginning to emerge. In addition. Alan Greenspan has remarked that there is a one-in-three chance of recession from the fallout."  : The legacy of Alan Greenspan has been cast into doubt with Senator Chris Dodd claiming he created the "perfect storm" . the Wall Street Journal reported that Alan Greenspan has said that the current turmoil in the financial markets is in many ways "identical" to the problems in 1987 and 1998. Considering that $500 billion in subprime mortgages will reset to higher rates over the next 12 months (placing additional pressure on homeowners) and recent increases in the payment default rate cited by the Federal Reserve. calling it a "vicious cycle" and adding that they "continue to believe conditions will get worse" . mortgage lenders. 16% of the estimated U.S. On September 7. As described in the background section above.3 trillion in subprime mortgages were in default as of October 2007. money managers and banks – in the main – all reaching for yield given the excellent ratings for these bonds. 2003 in the U. Regulators are carefully monitoring this exposure.
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