Bank Management Assignment

Riwaz Shrestha
1920623
5 BBA F

The subprime crisis was the rapid surge in increased mortgage defaults that began in 2007,
contributing to the worst recession in decades. The mid-2000s housing bubble, along with
historically low interest rates, spurred many lenders to make house loans to people with bad
credit. When the housing bubble broke, many borrowers found themselves unable to make
payments on their subprime mortgages. The subprime mortgage crisis triggered the economic
meltdown, the Great Recession, and a huge sell-off in asset markets.

Some banks provided mortgages to people who would not otherwise be able to take
advantage of the home-buying craze. These homeowners were denied standard loans due to
poor credit scores or other negative credit factors. These are referred to as subprime loans.
Subprime loans are those given to borrowers who have lower credit ratings than those
necessary for conventional loans. Traditional lenders frequently reject subprime applicants.
As a result, the interest rates on subprime loans given to these borrowers are often higher than
those on conventional mortgages. Banks were suddenly faced with loan losses on their
balance sheets when the housing market began to fall and borrowers were unable to pay their
mortgages. As unemployment rose across the country, many borrowers defaulted or had their
homes foreclosed on. Banks confiscate the lender's house in an insolvency crisis.
Unfortunately, because the economy was in a slump, banks were unable to market the
foreclosed houses for the same price that the borrowers were originally owed. As a result,
banks suffered enormous losses, which resulted in tighter lending, which resulted in fewer
loan origination in the economy. Fewer loans resulted in weaker economic growth since firms
and individuals lacked access to finance. The world's financial institutions, homeowners,
lenders, credit rating agencies, underwriters, and financiers all contributed to the subprime
mortgage crisis. Lenders were the worst offenders, readily providing loans to individuals who
couldn't afford them as a result of free-flowing cash after the dotcom bubble burst. Lenders
who never believed they would be able to purchase a home took out loans they knew they
would not be able to repay. Financial institutions, credit rating agencies, and hedge funds all
had a hand in the subprime disaster. Investors seeking high profits purchased mortgage-
backed securities at absurdly cheap premiums, boosting demand for additional subprime
mortgages.

Several factors have been cited for the subprime crisis. This included mortgage brokers and
investment businesses that made loans to persons considered high-risk in the past, as well as
credit agencies that were excessively enthusiastic about non-traditional lending. Critics also
attacked mortgage giants Fannie Mae and Freddie Mac, which promoted lax lending
standards by purchasing or insuring hundreds of billions of bad loans.