U.S. Subprime loan Issue

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Letter of transmittal

18 April 2008

Mr. A.W Brian De Silva

Department of Accounting and Finance

Monash University,

Caufiled Campus, 900 Dandenong Road

Caufield East, Victoria 3145, Australia

Dear Mr. De Silva,

 

Please accept the following business report entitled “Analysis of the US sub-prime loan issue” as requested for the unit AFF 1300, Money And Capital Markets.

The report outlines the reasons that caused the US sub-prime loan issue, which creates worldwide financial problems. Global impacts faced by other countries will also be discussed, with examples from the Australian Financial Markets.

I hope that this report will fulfill the requirement as given by the unit and the faculty.

Sincerely,

Olivia Husein

Business Report

Analysis of the US sub-prime loan issue

Name: Olivia Husein

ID number: (20505574)

Due date: 18 April 2008

Tutor: Mr. A.W Brian De Silva

Unit code: AFF 1300

Unit name: Money and Capital Markets

Assignment 1

Word count: 2492 words

Table of contents

Letter of transmittal        

Table of contents        

List of figures        

1.1        Figure. 1 Sub-prime mortgage origination        

1.2        Figure 2 credit rating on sub-prime performance in 2007        

1.3        Figure 3 Increasing share of securitized home mortgages        

List of tables        

1.4        Table 1 Write-downs on the value of loans, MBS and CDOs        

Executive summary        

2        Introduction        

2.1        Background information        

3        Body        

3.1        Reasons for the Sub-prime loan crisis        

3.1.1        Housing downturn- housing bubble        

3.1.2        Roles of financial institutions        

3.1.3        Role of credit agency        

3.1.4        Role of Securitization        

3.1.5        Hedge funds        

3.2        Global impact        

3.2.1        Credit crunch and the effect in the banking sector        

3.2.2        Effect in hedge funds        

3.2.3        Effect in equity markets        

3.2.4        Effect in financial institutions        

3.3        Impact in Australia’s Financial Market        

3.3.1        Australian New Zealand Bank (ANZ)        

3.3.2        Macquarie Bank        

3.3.3        Centro Properties Group        

4        Conclusion        

5        Appendices        

6        Reference lists        

List of figures

  1. Figure. 1 Sub-prime mortgage origination

Source:

  1. Figure 2 credit rating on sub-prime performance in 2007

Source: <>

  1. Figure 3 Increasing share of securitized home mortgages

Source: <http://economistsview.typepad.com>

List of tables

  1. Table 1 Write-downs on the value of loans, MBS and CDOs

Source: <http://news.bbc.co.uk>

Executive summary

The purpose of this report is to analyze the reasons of the sub-prime crisis, which has created worldwide financial market problems in recent time. The main Sub-prime issue will be focused in the US, but global impact throughout the world and examples from the Australian Financial markets will also be discussed.

Sub-prime lending originated in the US and had evolved with the realization of a demand in the marketplace and businesses providing a supply to meet it coupled with the unwillingness on the part of legislators at the national level to recognize the inherent risks to consumers (wikipedia, 2008).

In recent years, sub-prime lending had increased significantly due to several factors. Such as the housing downturn-housing bubble, carelessness of financial institutions and credit agency when lending money to sub-prime borrowers, the increasing practice of securitizations and hedge funds. These factors contribute to sub-prime crisis problems faced by the world now.

The impact of the sub-prime crisis causes great losses to financial institution and some had even filed bankruptcy. The economy now is also facing credit crunch, which decreases economic growth.

Financial institutions and companies such as Australian New Zealand Bank (ANZ), Macquarie Bank, Centro Properties Group and ABC Learning Centre are given as examples to demonstrate the impact of sub-prime crisis in Australia.

Information for this report is taken from electronic newspapers, magazines and Internet articles.

As a conclusion, due to the credit squeeze that results from the sub-prime loan issue, banks will increase interest rate for loan and will be more careful and strict in providing loans to the borrowers. Stock price will continue to decline, as investors will not want to invest their money in high-risk investment. However, investment in Australia will increase as investors see that Australia being a more stable economy is more attractive than US in the meantime.

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  1. Introduction

  1. Background information

Sub-prime loan is a type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. The additional percentage points of interest often translate to tens of thousands of dollars worth of additional interest payments over the life of a longer-term loan (investopedia, 2008).

Sub-prime lending originated in the US and had evolved with the realization of a demand in the marketplace and businesses providing a supply to meet it coupled with the unwillingness on the part of legislators at the ...

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