Mortgage Subprime Mortgage Crisis 5

Question 1

What was the global spread of the subprime mortgage crisis primarily caused by?

Accepted Answer

International banks had purchased U.S. mortgage-backed securities, spreading losses worldwide

Answer

Subprime mortgage practices were replicated in every developed country simultaneously

Answer

The U.S. Federal Reserve raised interest rates globally to address inflation

Answer

Foreign governments had directly guaranteed U.S. subprime loans as collateral

Question 2

What role did excessive leverage play in magnifying subprime crisis losses at major financial institutions?

Accepted Answer

High debt-to-equity ratios meant small declines in asset values wiped out entire capital bases

Answer

Leverage allowed firms to buy more mortgages at below-market rates from distressed sellers

Answer

Banks used leverage to hedge against falling home prices through short positions

Answer

Leverage enabled institutions to hold more cash reserves in anticipation of losses

Question 3

What is 'mark-to-market' accounting, and why did it become controversial during the subprime crisis?

Accepted Answer

Valuing assets at current market prices, which forced write-downs on illiquid MBS when markets froze

Answer

Pricing mortgages based on the original appraised value at loan origination

Answer

A method of recording foreclosure losses only when properties are actually sold

Answer

An accounting standard requiring banks to reserve 100% against all delinquent loans

Question 4

What does 'moral hazard' mean in the context of the subprime crisis bailouts?

Accepted Answer

The risk that guaranteeing firms against losses encourages future reckless behavior

Answer

The ethical obligation of banks to disclose all mortgage risks to borrowers

Answer

The legal principle holding executives personally liable for institutional fraud

Answer

The requirement that bailout recipients donate profits to foreclosure relief funds

Question 5

What was the 'National Mortgage Settlement' of 2012?

Accepted Answer

A $25 billion agreement between 49 states and the five largest mortgage servicers over foreclosure abuses

Answer

A federal program that settled all outstanding subprime foreclosure cases through arbitration

Answer

A Supreme Court ruling that voided all foreclosures conducted between 2007 and 2010

Answer

A law requiring mortgage servicers to modify all delinquent loans to affordable terms

Question 6

How did the Federal Reserve respond to the early stages of the financial crisis in 2007–2008?

Accepted Answer

It cut the federal funds rate aggressively and created emergency lending facilities for financial institutions

Answer

It raised interest rates to combat the inflation caused by rising home prices

Answer

It purchased all outstanding mortgage-backed securities directly from investors

Answer

It imposed a temporary ban on short-selling of financial institution stocks

Question 7

What is 'strategic default,' and why did it increase during the subprime crisis?

Accepted Answer

Deliberately stopping mortgage payments on an underwater home even when able to pay, because it is financially rational

Answer

A lender strategy of selectively defaulting on securitization obligations to maximize recoveries

Answer

A borrower tactic of paying only the minimum due each month to delay foreclosure indefinitely

Answer

A bank practice of declaring technical default to accelerate loan repayment from creditworthy borrowers