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

Banks in Europe, Asia, and elsewhere had bought U.S. MBS products, transmitting losses globally and turning a U.S. housing problem into the worst worldwide financial crisis since the Great Depression.

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

Investment banks were leveraged 30-to-1 or more, meaning a 3% drop in asset values could eliminate all equity, triggering insolvency and panic selling that accelerated the crisis.

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

Mark-to-market required firms to value MBS at fire-sale prices in frozen markets, potentially exaggerating losses and triggering capital requirement violations, prompting debates about relaxing the rule.

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

Critics argued that bailing out institutions like AIG and Citigroup rewarded risky behavior and sent the message that large banks would always be rescued, encouraging future excess.

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

The 2012 National Mortgage Settlement required Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial to provide $25 billion in homeowner relief over robo-signing and foreclosure fraud.

Mortgage Practice Test

Mortgage Practice Test

Mortgage Subprime Mortgage Crisis 5