However, this high return has a great premise, that is, American housing prices are rising. How can I put it? House prices are rising and the property market is hot. Although the default rate of these subprime mortgages is relatively high (this is easy to understand, because those people have poor credit status, no proof of income, and other debts are heavy, so it is easy to pay off the mortgage), even if the lending institution can't receive the loan, it can take back the mortgaged house and make a profit if it is sold again, because the property market is booming and house prices are rising.
So, how did the crisis happen? It was in 2006 that the American real estate market began to turn around, and house prices began to fall, making it difficult for buyers to sell their houses or obtain financing through mortgages. Even if the lender can't get the money back, taking the mortgaged house and selling it again (it's hard to say whether it can be sold, because the real estate market is shrinking and there is no market) will certainly not make up for the loss of lending. Then, the bonds issued from it are also worthless, because the loans related to it cannot be recovered. Didn't the institutions that bought these bonds lose money? Many investment banks and hedge funds bought these bonds or their portfolios, so they suffered heavy losses. For example, a series of events include:
-On February 3, 2007, 13, New Century Finance released the profit warning for the fourth quarter of 2006.
-HSBC Holdings increased its bad debt reserve for its subprime mortgage business in the United States by US$ 6,543.8+0.8 billion.
-Facing the debt of $654.38+074 billion from Wall Street, New Century Financial Corp, the second largest subprime mortgage company in the United States, announced on April 2 that it filed for bankruptcy protection and laid off 54% of its employees.
-On August 2nd, Societe Generale announced a profit warning, and later estimated a loss of 8.2 billion euros (this figure is really huge), because its Rhineland Fund with a scale of 654.38+0.27 billion euros and the bank itself participated in the US real estate subprime mortgage market a little and suffered huge losses. The Bundesbank convened banks from all over the world to discuss a package plan to save the German Industrial Bank.
-American Mortgage Investment Corporation, the 10 largest mortgage institution in the United States, formally filed for bankruptcy protection with the court on August 6, becoming another large mortgage institution in the United States after New Century Finance Corporation.
On August 8, Bear Stearns, the fifth largest investment bank in the United States, announced the closure of its two funds, also because of the subprime mortgage crisis.
-On August 9th, BNP Paribas, France's largest bank, announced the freezing of its three funds, which also suffered huge losses due to their investment in American subprime bonds. This move led to a sharp drop in European stock markets.
-/kloc-In August of 0/3, Mizuho Group, the parent company of Mizuho Bank, Japan's second largest bank, announced that the US subprime mortgage-related losses were 600 million yen. Japanese and Korean banks suffered losses due to the US subprime mortgage crisis. According to the estimation of UBS Securities Japan, the nine major banks in Japan hold more than one trillion yen of US subprime mortgage-backed securities. In addition, five Korean banks, including Woori, invested 565 million US dollars in CDO. Investors are worried that the subprime mortgage problem in the United States will have a strong impact on the global financial market. However, Japanese analysts are convinced that most of collateralized debt obligation invested by Japanese banks have the highest credit rating, and the impact of the subprime mortgage crisis is limited.
-Later, Blossom Group also announced that the losses caused by subprime loans in July reached 700 million US dollars, but for a financial group with an annual profit of 20 billion US dollars, this is only a small amount.
However, the crisis triggered by the subprime mortgage crisis has seriously affected the liquidity of various countries. To put it simply, in the case of uncertain subprime mortgage prospects, banks naturally tightened credit and avoided lending, which led to a sharp rise in short-term interbank lending rates. In other words, everyone doesn't want to put money out, because it's not clear how big the loss of subprime loans will be and what the financial situation will be, so other banks have raised the interbank offered rate. On the other hand, the inter-bank lending rate is very high, which greatly increases the financing cost, so even banks themselves are reluctant to borrow money from other banks. Therefore, the liquidity of funds is greatly reduced, and the risk is great, which has a great impact on the financing needed for the development of all walks of life in China. Federal Reserve, European Central Bank, Bank of Japan, etc. Seeing the current liquidity suddenly tightening, they urgently injected huge amounts of money into the market. Central banks have injected more than 300 billion dollars into the market in a few days by announcing that they will provide unlimited loans to major banks that are lower than the interbank lending rate in the market, in order to reduce the interbank lending rate. However, such a move will further show the financial market the seriousness of the subprime mortgage crisis. For example, the Federal Reserve and the European Central Bank injected huge amounts of money into the market to maintain liquidity, which was the first time since the September 1 1 terrorist attacks. Whether the crisis will expand further depends on how much banks in various countries have lost on subprime loans.
In fact, the symptoms of the US subprime mortgage crisis began as early as the end of 2006. However, it took more than half a year from the appearance of symptoms and the accumulation of problems to the confirmation of the crisis, especially when international financial institutions such as Dambert Stearns, Merrill Lynch, Citibank and HSBC announced that they had lost tens of billions of dollars due to the subprime mortgage crisis. Now it seems that the subprime mortgage crisis will last for a long time and have a great impact because of its wide coverage, complex causes and special mechanism. Specifically, there are three reasons.
First of all, this has something to do with the US financial regulatory authorities, especially the Federal Reserve, shifting monetary policy from loose to tight in the past. As we know, starting from 200 1, the US federal funds rate was lowered by 50 basis points, and the Fed's monetary policy began to shift from raising interest rates to lowering interest rates. After 13 interest rate cuts, by June 2003, the federal funds rate had dropped to 1%, the lowest level in the past 46 years. The loose monetary policy environment is reflected in the real estate market, that is, the mortgage interest rate has also dropped in the same period. The interest rate of 30-year fixed mortgage decreased from 8. 1% at the end of 2000 to 5.8% in 2003. The annual adjustable interest rate of mortgage interest rate decreased from 7.0% at the end of 200 1 to 3.8% in 2003.
The continuous decline of interest rate at this stage is an important factor leading to the continuous prosperity of American real estate and the bubble of subprime mortgage market since 2 1 century. Because of the drop in interest rates, many high-risk financial innovative products have the possibility of production, and also have the opportunity to expand in the real estate market. One of the manifestations is that floating rate loans and interest-free loans are popular, accounting for a rapid increase in the proportion of all mortgage loans. Compared with fixed interest rates, these innovative forms of financial loans only require buyers to bear a lower and flexible repayment amount every month. On the surface, this has reduced the pressure on property buyers and supported the prosperity of the past few years.
Since June 2004, the Fed's low interest rate policy has begun to reverse. By June 2005, the federal funds rate had been raised from 1% to 4.25% after 13 consecutive interest rate hikes. By August 2006, the federal funds rate had risen to 5.25%, which marked a complete reversal of this round of expansionary policies. Continuous interest rate hikes have increased the cost of housing loans, and started to play a role in restraining demand and cooling the market, resulting in a drop in house prices and a substantial increase in the risk of mortgage default.
Secondly, it is related to the continuous positive and optimistic mood of the US investment market and the global economy and investment environment in the past. As we all know, in the 2nd/kloc-0th century, the trend of global economic and financial globalization was strengthened, the global interest rate dropped for a long time, the dollar depreciated and the asset price rose, which expanded the liquidity around the world and stimulated the popularity of financial products and investment behaviors that pursued high returns and ignored risks. Sub-prime mortgage derivatives, as a kind of loan package securitization investment, buy mortgage loans from original lenders and sell them to investors, objectively have room for return on investment.