The Subprime Meltdown Essay Example | Topics and Well Written Essays - 1250 words

The Subprime Meltdown - canvas Example(Gordon, 2008). The less stringent regulations for financial sector encouraged banks and other financial institutions to go on change spree by defying prudent impart practices and lend into those beas which were historically considered as bad recognition areas. Subprime mortgages is also the part of same sequences under which banks financed mortgages of those borrowers who had the histories of default. Based on the concept of high risk-high reward, banks and financial institutions devised products which catered the call for of subprime borrowers which ultimately resulted into the crisis as subprime borrowers started to default on their payments. The problem emerged when, through financial innovation, banks and financial institutions securitized those mortgages and issued fixed income securities whose payments were even with the repayments received from subprime mortgage repayments. The process of securitization thus created essentially th e mismatch between cash flows which finally culminated into the crises.This enquiry paper will attempt to analyse and understand how and why crisis emerged, where the crisis emerged and the possible role of hedge currency into crises in any case discussing its impact on world financial markets in general and Australian Financial Markets specially.Sub-Prime lendSubprime lendingSub-Prime lending typically has been characterized as lending at relatively costly interest rates and fees to denotation impaired or otherwise high risk borrowers. (Lax, Manti, Raca, & Zorn, 2004). Sub prime lending is relatively a new and a popular especially for mortgage loans like interest loans. These types of loans are typically targeted to for the first time time buyers of homes or borrowers with restricted capacity to finance new home purchase. Most of the homeowners tend to mathematical function this class of borrowing in order to consolidate their debts or when their credit ratings fall to a aim where they can be declared as bankrupts mainly due to the fact that their available funds are utilized in some other resourcess such as high medical bills etc. (Blanton, 2005). Subprime lending became famous for many reasons. On one hand it not catered the needs of low quality customers just now also provided an opportunity to the financial institutions to charge high amount of interest rates and other fees whence banks, spotting the opportunity to earn high started to lend extensively in this area. Due to this perceived high reward, financial institutions take the risk because it is compensated through better returns.Subprime lending- a problemMost of the subprime lending has been made in mortgage markets. It was because of this reason that homeownership increased tremendously over the period of time besides being favorite of the persons with loose credit ratings and a history of defaults. With the advent of financial innovation which took infinite especially after 1970s saw th e emergence of financial derivatives as one of the most beta financial instruments for banks to use in different situations. Banks, in order to regain the lost liquidity utilise in subprime lending started to securitize their mortgage portfolios by issuing mortgaged backed securities. However,