The impact of the U.S. subprime mortgage crisis on world politics

Subprime mortgage crisis

The full name is "subprime mortgage crisis", a financial crisis caused by the turmoil in the U.S. subprime mortgage market. In August 2007, a storm caused by the bankruptcy of subprime mortgage lenders, forced closure of investment funds, and violent stock market fluctuations swept through the world's major financial markets such as the United States, the European Union, and Japan.

Continuous interest rate hikes set off a "ticking time bomb"

The direct cause of the storm in the U.S. subprime mortgage market is the rise in U.S. interest rates and the continued cooling of the housing market. Subprime mortgages are loans made by some lenders to borrowers with poor credit and low incomes. When the U.S. housing market was highly prosperous in the past few years, the subprime mortgage market developed rapidly, and even some borrowers who were usually considered to be unable to repay their debts obtained home purchase loans. This set the stage for the subsequent subprime mortgage market crisis. The formation has laid hidden dangers.

In the two years ending in June 2006, the U.S. Federal Reserve raised interest rates 17 times in a row, raising the federal funds rate from 1% to 5.25%. The sharp rise in interest rates has increased the mortgage repayment burden on homebuyers. Moreover, since the second quarter of last year, the U.S. housing market has begun to cool significantly. As home prices fall, homebuyers have difficulty selling their homes or obtaining financing through mortgages. Affected by this, many borrowers in the subprime mortgage market were unable to repay their loans on time, and the crisis in the subprime mortgage market began to emerge and intensify.

Some European and American investment funds were hit hard

With the emergence of the subprime mortgage market crisis in the United States, the first to be affected were some lending institutions engaged in the subprime mortgage business. Since the beginning of this year, many subprime mortgage companies have suffered serious losses and were even forced to file for bankruptcy protection, including New Century Financial Corporation, the second largest subprime mortgage lender in the United States.

At the same time, because lending institutions usually package subprime mortgage loan contracts into financial investment products and sell them to investment funds, etc., as the crisis in the U.S. subprime mortgage market intensifies, some people buy such investment products. US and European investment funds were also hit hard.

Take Bear Stearns, the fifth largest investment bank in the United States, as an example. Due to the subprime mortgage market crisis, two of its funds recently collapsed, resulting in a total loss of more than 15% for investors. billion dollars. In addition, BNP Paribas announced on the 9th that it would suspend transactions in three of its funds involved in the U.S. mortgage business. The market value of these three funds has shrunk from 2.075 billion euros on July 27 to 1.593 billion euros on August 7.

May affect global economic growth

What is more serious is that as the crisis in the U.S. subprime mortgage market expands to other financial sectors, banks generally choose to increase loan interest rates and reduce the number of loans. , leading to a vague liquidity crisis in major global financial markets. On the 9th, after BNP Paribas announced the suspension of trading in three of its funds, investors' concerns about the credit market intensified, causing European and U.S. stock markets to fall sharply. Among them, the Dow Jones 30 industrial stock average price index in the New York stock market fell 387.18 points from the previous trading day, closing at 13270.68 points, a decrease of 2.83%.

Market analysts pointed out that if the U.S. subprime mortgage market crisis further escalates and expands to more financial fields, it will lead to more severe turmoil in the global financial market. Moreover, if the crisis affects personal consumption expenditures, the main driver of U.S. economic growth, it will have a negative impact on U.S. and global economic growth.

European, American and Japanese central banks responded urgently

Faced with the U.S. subprime mortgage market storm that has formed or even expanded, the central banks of the United States, the Eurozone and Japan are taking active actions. It hopes to restore investor confidence and maintain financial market stability by providing huge amounts of funds to the money market. The European Central Bank announced on August 9 that it would provide 94.8 billion euros in funds to relevant banks. On August 10, the European Central Bank once again announced a capital injection of 61 billion euros into the euro zone banking system to alleviate the illiquidity problem caused by the U.S. subprime mortgage crisis and stabilize the credit market. The Federal Reserve Bank of New York, a subsidiary of the Federal Reserve, injected US$24 billion into the banking system on the 9th. The Bank of Japan announced on August 10 that it would inject 1 trillion yen into the Japanese money market.

The subprime debt crisis in the United States was like a storm cloud. Not only did the Dow Jones Industrial Average continue to plummet, but the three major European stock market indexes, the Nikkei Index and the Hang Seng Index also experienced sharp declines.

In order to prevent the crisis from spreading further, statistics say that in just 48 hours, central banks around the world have injected more than US$320 billion in emergency "fire-fighting" funds.

It should be said that the starting point for the creation of subprime mortgage loans in the United States was good, and it also achieved remarkable results in the first 10 years. From 1994 to 2006, the homeownership rate in the United States increased from 64% to 69%. During this period, more than 9 million families owned their own homes, largely due to subprime mortgages. More than half of the people who used subprime mortgages to obtain homes were minorities, and most of them were low-income people who were unable to obtain ordinary mortgages because of poor credit records or the inability to pay a down payment. Subprime mortgages gave low-income earners options rather than outright denying them home loans.

But the high risk nature of subprime mortgages also comes with their easy availability. Compared with the 6% to 8% interest rate of ordinary mortgage loans, the interest rate of subprime mortgage loans may be as high as 10% to 12%, and most subprime mortgage loans take the form of adjustable interest rates (ARM). Interest rates, subprime mortgage repayment rates, were getting higher and higher, ultimately leading to higher delinquency ratios and foreclosure rates, leading to today's crisis.

Lending impulse

From 2001 to 2004, the Federal Reserve’s implementation of low interest rate policies stimulated the development of the real estate industry. Americans’ enthusiasm for home buying continued to increase, and subprime mortgages became a An option for homebuyers who don't qualify for prime-grade loans.

Intensified competition among lenders has given rise to a variety of high-risk subprime mortgage products. Such as interest-only mortgages, which are different from traditional fixed-rate mortgages in that they allow borrowers to pay only interest and no principal in the first few years of borrowing. The borrower's repayment burden is much lower than that of fixed-rate loans, which makes Some low- and middle-income people have entered the market to buy houses. But after a few years, the borrower's monthly repayment burden continues to increase, leaving the hidden danger that the borrower may not be able to repay in the future.

Some lending institutions have even launched "zero down payment" and "zero documentation" loan methods, that is, borrowers can buy a house without funds and only need to declare their income without providing any relevant information. Proof of repayment ability, such as salary slips, tax payment certificates, etc. The Mortgage Asset Research Institute, a consulting group in Virginia, conducted a follow-up study of 100 such "zero-document" loans in April 2006. Comparing reported income with tax returns submitted to the Internal Revenue Service (IRS), it was found that 90% of borrowers overstated their personal income by 5% or more, and 60% of borrowers overreported their income by more than half their actual income. A report by Deutsche Bank stated that such "fraudulent loans" accounted for 40% of all subprime mortgages issued in 2006, compared with 21% in 2001.

These new products are all the rage. On the one hand, the continued prosperity of the housing market causes borrowers to underestimate potential risks; on the other hand, lending institutions do not have adequate risk control and intensified competition. They only try their best to promote these products, but intentionally ignore the steps of explaining the risks to borrowers and confirming the borrower's repayment ability. Federal Reserve data show that subprime loans accounted for 20% of all residential mortgage loans from 5% in 2006.

Loose loan qualification review has become an important driving force for the unprecedented activity of the real estate transaction market, but it has also sown the seeds of crisis. In the past two years, as the Federal Reserve raised interest rates 17 times, the U.S. real estate market has gradually shown signs of cooling, but the subprime mortgage market has not stopped.

When making subprime mortgages, both lenders and borrowers believed that if they had difficulty repaying the loan, the borrower would simply sell the home or refinance the mortgage. But in fact, as the Federal Reserve raises interest rates 17 times in a row and the housing market continues to cool down, it is difficult for borrowers to sell their homes. Even if they can sell, the value of the home may fall to the point where it is not enough to repay the remaining loan. At this point, cases of late payments and foreclosures naturally arise.

Once the number of cases increases significantly, it will inevitably lead to pessimistic expectations for the subprime mortgage market, and the subprime market may suffer serious shocks, which will impact the capital chain of the loan market and then affect the entire mortgage market. At the same time, real estate market prices will continue to fall as homeowners try to cut their losses. The superposition of these two factors forms the Matthew effect, creating a vicious circle and exacerbating the occurrence of secondary market crises.

"Hunting" Lending

On March 22, 2007, the U.S. Senate Banking Committee held a hearing titled "Mortgage Market Crisis: Causes and Consequences." At the meeting, consumer representative Jennie Haliburton told her story: When she took out a loan a few years ago, she told the loan officer that she could only pay $700 a month. The loan officer persuaded the retiree to chip in $800 a month, and she accepted. When you take out a loan, you don’t know that the monthly payment will rise. "I found out later that I was paying $100 a month," said consumer Eagle, who asked for a 30-year fixed rate. "But when I signed the paperwork, I found out I couldn't get a fixed rate. The loan officer said don't worry, Interest rates may also go down." As a result, he watched the monthly payment rise from less than $2,100 to more than $2,300, and he is worried that it will continue to rise.

Like most industries, most subprime mortgage professionals are indeed good, honest and decent people, and many borrowers' problems are indeed caused by their own negligence or irresponsible spending impulses. But it is undeniable that, driven by huge profits, in the past few years, some bad apples in the industry have used various methods such as home visits, phone calls, mailed materials, emails, Internet pop-up advertisements, etc. to earn more commissions through various fraudulent means. Including deliberately concealing information, providing false information, encouraging or even falsely reporting income on behalf of consumers, etc., to lure consumers into taking the bait, and the victims of "biting the hook" are often the most vulnerable among vulnerable groups: poor, poorly educated, elderly, and single Mothers, minorities, new immigrants, etc. - their financial situations may be completely destroyed, their homes completely lost, and even their "American Dream". There are a wide range of bad behaviors in subprime mortgage lending, but they can be summarized into two categories:

■ Predatory lending: The lending institution or its agent fails to provide consumer loans in accordance with the relevant provisions of U.S. law. Investors must truly and fully disclose complex information about loan terms and interest rate risks. In such cases, the victims are often consumers;

■ Mortgage fraud: Loan fraud crimes directed by professional criminals, and the victims are usually lending institutions.

The so-called "hunt for lending", according to Senator Christopher J. Dodd, Chairman of the Senate Banking Committee:

"In recent years, the types of loans that have dominated the subprime mortgage market are A hybrid adjustable-rate mortgage (ARM) usually has a fixed interest rate for the first two years, and the rate of increase is usually large every six months thereafter. Many borrowers cannot afford the monthly payments and have to refinance at a higher cost and sell their homes.

No loan should force borrowers into this devilish dilemma when making these loans based on the value of the property, not the borrower. The ability to repay debt. This is the basic definition of "hunting lending". As early as 1968, the U.S. Congress passed the "Truth in Lending Act of 1968" to protect consumers. . The law requires lenders to clearly disclose all terms and costs of loan transactions. In other words, when lending, loan intermediaries who provide incorrect information or fail to fully explain all the risks of a loan to consumers should be prosecuted for fraud.

Given that in the United States, residential mortgage intermediaries are primarily regulated by states and the federal government does not have overall statistics on fraud and irregularities in the industry, it is unclear how they are distributed. But the number of "suspected" mortgage fraud cases reported by banks and other lenders doubled between 2004 and 2006, according to figures released by the FBI. Legal professionals think so. As the subprime mortgage crisis intensifies, related criminal and civil litigation will also increase significantly.

At present, the agency most similar to the "mortgage police" in the United States is the Office of the Inspector General of the federal Department of Housing and Urban Development. This agency has approximately 650 investigators and auditors responsible for tracking down mortgage fraud and "lending hunting" cases. . In the past three years, the agency has conducted 190 audits of mortgage institutions and intermediaries, prosecuted 1,350 cases, and recovered US$1.3 billion in losses. But even the agency doesn't know if it has gotten to the heart of the problem. Inspector General Kenneth Donohue said in an interview with MSNBC: "You almost have to have a crystal ball to predict the future. Is what we are seeing now the entire iceberg, or is it just the tip of the iceberg that has emerged from the water? "It's too early to tell." In fact, according to the information that can be found through Google, since at least 1999, there have been reports of "hunting lending" and other unethical practices in the subprime mortgage market, and even in accordance with U.S. law. Behavior that constitutes a criminal offense has occasionally been reported in the press. This leads to our next topic: What have financial regulators been doing during this period?

Absence of supervision

On March 22, 2007, at the "Mortgage Market Crisis: Causes and Consequences" hearing of the U.S. Senate Banking Committee, Committee Chairman Dodd told the U.S. financial regulatory authorities, In particular, the Federal Reserve made a stern accusation for its inaction:

“Our financial regulatory authorities should have been ready guards to protect hard-working Americans from irresponsible financial institutions. But unfortunately What's wrong is that they've been sitting on the sidelines for a long time." Here's how financial regulators have long been inactive:

Financial regulators told us they first noticed the lowering of credit standards in late 2003. At that time, Fitch Rating had already put a major subprime mortgage institution on its "credit watch" list, expressing concerns about the institution's subprime mortgage business.

Data collected by the Federal Reserve Board of Governors clearly suggest that by early 2004, lenders began to relax lending standards.

"Despite these warning signs, in February 2004, Fed leadership appeared to be encouraging the development and use of adjustable-rate mortgages, the very types of loans that today are piling up bad debts and leading to the foreclosure of many borrowers' mortgages. Foreclosure. At that time, the Fed Chairman said in a speech to the National Credit Union Administration (NCUA): 'If lenders offer alternative mortgage products that are better than traditional fixed rates, American consumers may take them. Gains. '" Shortly thereafter, the Fed raised interest rates 17 times in a row, raising the federal funds rate from 1% to 5.25%.

"So, in a nutshell, as early as the spring of 2004, financial regulators had begun to pay attention to the relaxation of lending standards. At the same time, the Federal Reserve continued to raise interest rates while continuing to encourage lending institutions Developing and selling adjustable-rate mortgages. In my opinion, it is this paradoxical behavior that has created the current storm engulfing millions of American homeowners."

May 2005. The media began to report that economists were warning about the risks of new mortgage loans.

In June of the same year, Chairman Greenspan said that he was also worried about the proliferation of new mortgage products.

But it was not until December 2005 that the financial regulatory authorities began to propose regulatory guidelines aimed at curbing irresponsible lending practices. It was not until nine months later, in September 2006, that the belated guidance was finalized.

“But even now, the regulatory authorities’ response is still incomplete. It was only in early March 2007, three years after becoming aware of the problem, that the financial regulatory authorities agreed to incorporate the protective measures in the guidelines. Derived to those who are more vulnerable. These lenders are less likely to understand the complexities of the products that were previously pushed to them and have fewer resources to protect themselves if trouble strikes. We are still waiting for the final implementation of the guidance. ” p>

The Dodd plan promotes legislation to protect subprime mortgage lenders and clamp down on high-risk lenders. Hillary Clinton called on the federal government to establish a "foreclosure moratorium" to give borrowers more time to repay, and hoped to reduce "prepayment penalties."

The National Community Reinvestment Coalition (NCRC) wants the Department of Housing and Urban Development to be authorized to refinance to subprime borrowers and for the federal government to create a fund to bail out low-income homeowners.

But is this crisis really serious enough to require government intervention? Many economists hold a negative view on this: delayed repayment (delinquency) does not equal default (default), and many borrowers can eventually repay without government help. And based on past experience, loan companies often renegotiate loan terms with borrowers to reduce borrowers' repayment pressure. Joseph Gyourko, a professor of real estate finance at Wharton School of Business, believes that the government does not need to take any measures at present, and the market will automatically adjust. If the government intervenes in the current uncertain situation, it is likely to trigger moral hazard and lead to greater market volatility. .

Princeton University economist Harvey S. Rosen, who served as President Bush’s economic adviser, pointed out:

“Should it be made more difficult for low-income people to obtain subprime mortgages, or should they simply make it more difficult for low-income people to obtain subprime mortgages? Will one of these three be the ultimate public policy choice for the government, to prevent people from getting mortgages, or to let people make their own choices and know that they will sometimes make mistakes?