| Mortgage Securitization Essay Good thesis writing Essay done for you
This paper analyses mortgage securitization and its connection to the recent financial crisis. Mortgage securitization refers to the use of some immovable and illiquid assets as security or collateral to get financing. This is done at the prevailing interest rates. When the rates are lower, the cost of borrowing is low. Thereby many people borrow. On the other hand, when the interest rates are high, the cost of borrowing is high. Therefore, few people would find it desirable to borrow.
Lending institutions lend money to its |ers based on the value of the property. Banks give loans at some percentage of its value or the full amount based on the policies that guide the exercise and the credit worthiness of a borrower. The borrowers are then supposed to service the loan within some predetermined period. In the recent financial crisis, borrowers had taken out loans, but defaulted in making repayments.
The main reason for defaulting is the high interest rates. When borrowing, the rates may be low and hence affordable. When repaying, if the interests are high, it means that the interest to be paid is high. Such makes repayment difficult. Therefore, a significant number of borrowers are unable to repay their loans. This is in contravention of agreements between lending institutions and loan recipients. Upon, defaulting, the lenders are entitled to auction the security, mostly land.
The crisis worsens when the collateral used cannot be auctioned or sold at a price that allows the lenders to realize their interest. Therefore, they either sell at a much lower price or completely fail to sell the collateral. This leaves the banks with no money for business. Without borrowing, the banks are basically not in business. This left many banks stripped of resources forcing many governments to intervene and use public resources to save them from total collapse. Increased lending coupled with a high default rate caused this crisis.