U.S and European markets

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The sub prime crisis affected the U. S and European markets and economy in that there was a deterioration of lending standards and a decrease in the sub prime- prime mortgage rate in the last seven years. The rising and falling of the sub prime mortgage market led to the lending boom-burst scenario of which the unstable market growth rose. The falling of the house prices led to the loan deterioration in very many areas.

The credit quality of most of the mortgage vintages worsened, the charge offs in the U. S rose, the large commercial banks experienced losses that were prompted by the low albeit loss from major credit sections. The governments of the US and European were forced to reduce their share prices in all the housing enterprises that they sponsored. The market got destabilized in the U. S due to the decline in the housing market, which made the households and the financial institutions not to make a quick recovery from the losses already experienced . The sub prime crisis affected the economy of the US and the European countries in that it led to the tightening of all credit conditions on all types of loans.

This was a big blow to the economy since the banks reduced the flow of the credit to the business enterprises and the citizens themselves. The sub prime crisis on the mortgage has affected the US and European markets by lowering the investor confidence in the various segments of the credit market, leverage buy-out loans (LBOs) , auction-rate securities and the consumer credit cards as well as student car loans. It led to the rising of the insurance on the European speculative bonds that was charged against default

Despite the banks in the regions being known for successfully raising capital, the sub prime crisis made them disclose losses that exceeded all the capital that they raised, this made the banks to face a lot of difficulties in maintaining their earnings. The credit quality went down, the funding costs increased, and this led to their exposure to the mortgage insurers. The market prices of most of the asset commodities fell, and also in most banks within the region the share prices fell drastically leading to the rise in the credit default risk.

The sub prime crisis led to the banks selling most of their assets hence making very strict and tight conditions for those who wanted to borrow funds. The commodity prices rose leading to a high price discrimination that was mainly poised by huge external imbalances . The financial markets became exceptionally liquid leading to higher leverage and greater risk-taking. It affected the investors in U. S and the European countries in that the write-offs of losses on securities linked to the sub prime mortgages and other segments of the credit markets rose to over trillion US dollars.

It also led to a stop on the operation on asset backed commercial paper market, and also the considered special investment vehicles were liquidated. The banks suffered the liquidity problems recording big losses and also brokerage houses topping US$300 billion. The sub prime crisis caused the risk premium for some financial institutions to record an increase to very high level, it made it to be more expensive for financial than for non-financial firms having the same credit ratings to raise cash . The interest rates became low spurring the increase in mortgage financing and an increase in the price of the various houses.

The sub prime mortgage was perceived by the investors to offer higher returns than standard mortgages and consequently demand securitization. The sub prime crisis further led to the increase in demand for the increasingly complex structured products such as the collateralized debt obligations which embedded the leverage within their structures exposing investors to higher risk of default . The sub prime borrowers became credit unworthy, often highly levered with high debt-to-income ratios as compared to large loan to value ratios offered to them.

This led to the increase in debt service burdens for loans hence bringing financial distress for some the group of borrowers; this continued for some time and is still going on. The sub prime mortgage crisis also affected the financial markets in that the rising in the house prices made it difficult for the sub prime borrowers to refinance, hence they ended up incurring higher mortgage costs . The credit standards by mortgage originators went down, and the pressure to increase the supply of the sub prime mortgages rose due to the investors demanding higher yielding assets.

The sub prime crisis created an environment where some lenders applied unaccepted practices in the lending processes. One of the practices is them issuing sub prime mortgages to those whom their credit worthiness qualifies them for lower risk types of mortgages, still gave others mortgages that they were never qualified to have. These cases of fraud increased to a very higher rate . The sub prime crisis affected the US and European economy in that, the mortgage-backed securities that were held by the Structured Investment vehicle declined in value all the way to default.

The rate of losses and the rate of occurrence of defaults are dependent on the economy, the rate of the losses increases with the decrease in economy. It also contributed to the fundamental problem of valuation of the securitized trances for the sub prime mortgage assets. This is because the valuation of the simple credit default swap requires the specifications of the probability of default of the obligor over the life of the swap and loss if at all there is an occurrence of default .

The difficulty in valuation also greatly increased when it comes to the pricing of the assets like the mortgages, credit cards, this was so since there were few prices that were available for use in calibration, and this has led to illiquidity of the markets. The mis-pricing of the assets within the market brought about the widespread in lack of transparency of the assets mostly held by the institutions. The sub prime crisis led to the emergence of major frictions within the US and the European market and economy. One of the frictions was that it led to the offering of many complex products which became subject to Mis-representation.

Also the assigning of the credit ratings to sub prime mortgages was significantly erroneous leading to investors having difficulty to evaluate the efficacy of the various marketing models . The sub prime crisis interfered with the economical performance condition where there was a record of low votality in interest rates. It led to the operation of the markets by whim of very few individuals having concentrated power to manipulate the market determinants; this led to high market inflation. This made a complete and total mockery of every economic and financial theory of the US and European countries.

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