Mortgage Subprime Mortgage Crisis Question and Answers 3

Question 1

What was the Troubled Asset Relief Program (TARP) initially authorized to spend when signed into law in October 2008?

Accepted Answer

$700 billion

Answer

TARP was initially authorized at $700 billion to purchase toxic assets and inject capital into financial institutions, though the amount was later reduced to $475 billion by the Dodd-Frank Act.

Question 2

Which investment bank's collapse in September 2008 is widely considered the event that triggered the most acute phase of the financial crisis?

Accepted Answer

Lehman Brothers

Answer

Lehman Brothers filed for bankruptcy on September 15, 2008, which sent shockwaves through global financial markets and is widely regarded as the tipping point of the crisis.

Question 3

What type of adjustable-rate mortgage feature caused many subprime borrowers to face sudden payment increases after an initial period?

Accepted Answer

Teaser rate that reset to a much higher indexed rate

Answer

Many subprime ARMs featured low teaser rates for two or three years that then reset to significantly higher rates tied to an index, causing payment shock for borrowers.

Question 4

What term describes the process by which mortgage loans were pooled together and converted into tradable securities sold to investors?

Accepted Answer

Securitization

Answer

Securitization involved pooling thousands of individual mortgages into mortgage-backed securities that were then sold to investors in tranches with varying risk levels.

Question 5

Which credit rating agency practice contributed to the crisis by assigning AAA ratings to risky mortgage-backed securities?

Accepted Answer

Issuer-pays model where the agencies were paid by the same banks whose products they rated

Answer

The issuer-pays model created a conflict of interest because rating agencies were compensated by the same institutions whose securities they were rating, incentivizing inflated ratings.

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Mortgage Subprime Mortgage Crisis Question and Answers 3