Unit Trust In Malaysia For 01 07 2009

http://fundprice.my/home/popular

Kuala Lumpur Composite Index 1075.84 0.00 29 Jun

Subprime mortgage crisis

Background and timeline of events
The immediate cause or trigger of the crisis was the bursting of the United States housing bubble that peaked in approximately 2005–2006. High default rates on "subprime" and adjustable rate mortgages (ARM), began to increase quickly thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008.
In the years leading up to the crisis, high consumption and low savings rates in the U.S. contributed to significant amounts of foreign money flowing into the U.S. from fast-growing economies in Asia and oil-producing countries. This inflow of funds combined with low U.S. interest rates from 2002-2004 resulted in easy credit conditions, which fueled both housing and credit bubbles. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load. As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of U.S. dollars globally.
While the housing and credit bubbles built, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations. These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses. These losses impacted the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions, assuming significant additional financial commitments.
The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. Effects on global stock markets due to the crisis have been dramatic. Between 1 January and 11 October 2008, owners of stocks in U.S. corporations had suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40%. Losses in the stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine. Leaders of the larger developed and emerging nations met in November 2008 and March 2009 to formulate strategies for addressing the crisis. As of April 2009, many of the root causes of the crisis had yet to be addressed.

Real Causes

If you want to know the root cause of the current subprime crisis, there arethree things you need to understand:
First, the problem was caused by politicians (primarily Democrats) pushing their "entitlement" agenda in to the free market. It started with "The Community Reinvestment Act" (CRA) which required banks to make high risk loans to minorities and others who could not have qualified for a home loan or business loan under normal circumstances.

Second, Bill Clinton further liberalized the CRA and signed a bill to repeal the Glass-Stengal Act. This Act was put in place in the 1930s following the bank failures during the Great Depression. It was designed to keep banks out of the speculation business.

Third, George Bush proposed major changes in the CRA, FMAE and FMAC in 2003 that would have tightened requirements for these business loans and subprime home mortgages. The vote went along party lines, the Democrats won and the proposed changes were defeated.

The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and savings and loan associations to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as "redlining." The purpose of the CRA is to provide credit, including home ownership
opportunities to underserved populations and commercial loans to small businesses. It has been subjected to important regulatory revisions.

Original Act
The CRA was passed into law by the 95th United States Congress in 1977 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community.

[1] Only one banker, Ron Grzywinski from ShoreBank in Chicago, testified in favor of the act.

[2] The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an
institution's application for deposit facilities, including mergers and acquisitions. The CRA is enforced by the financial regulators (FDIC, OCC,OTS, and FRB).

The bill encouraged the Federal National Mortgage Association, commonly known as Fannie Mae, to enable mortgage companies, savings and loans,commercial banks, credit unions, and state and local housing finance
agencies to lend to home buyers. It also encouraged the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, to buy mortgages on the secondary market and sell them as mortgage-backed securities on the open market Due to massive financial losses, on September 7, 2008 the Federal Housing Finance Agency (FHFA) put Fannie Mae and Freddie Mac under the conservatorship of the FHFA.

Clinton Administration Changes of 1995
In 1995, as a result of interest from President Bill Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs.

These revisions with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and
potential revision.

Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by
Bear Stearns. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.

Other rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks. By 2007, Fannie and Freddie owned or guaranteed nearly half of the
$12 trillion U.S. mortgage market.


George W. Bush Administration Proposed Changes of 2003

In 2003, the Bush Administration recommended what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. This change was to move
governmental supervision of two of the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mac under a new agency created within the Department of the Treasury. However, it did not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enabled them to issue debt at significantly lower rates than their competitors. The changes were generally opposed along
Party lines and eventually failed to happen. Representative Barney Frank (D-MA) claimed of the thrifts "These two entities-Fannie Mae and Freddie Mac-are not facing any kind of financial crisis, the more people exaggerate
these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." Representative Mel Watt (D-NC) added "I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing.

Criticism
Some economists have claimed that the CRA encouraged risky lending and contributed to the development of the subprime mortgage crisis. According to the Wall Street Journal, the law forced banks to make loans to
borrowers who often could not repay them. Federal Reserve chairman Ben Bernanke admitted that an underlying assumption of the CRA - that more lending is always better for local communities - is questionable.
However, Robert Gordon who has pointed out disputes this that approximately half of the loans were made by independent mortgage companies that were not regulated by the CRA, and thus had no government obligation to
offer credit to minorities. In the later part of the crisis, these mortgage companies made subprime loans at twice the rate of CRA banks. Another third of the major subprime lenders were regulated, but had very little CRA
involvement. Gordon also makes the argument that the weakening of the CRA in 2004 was followed by intensified subprime lending. Austrian economist Thomas DiLorenzo counters Gordon's statistic by arguing that even if half of the subprime loans were made by non-CRA companies, the CRA had still caused tens of billions in defaults on mortgages by unqualified borrowers. He also argues against Gordon's three main propositions stating
that Gordon's first two propositions flatly contradict each other, whereas the third is unequivocally false.

Congressman and 2008 Republican presidential candidate Ron Paul haspartially attributed the ongoing subprime mortgage crisis to legislation such as the CRA. Economist Stan Liebowitz has also expressed his opinion
that banks were forced to loan to un-credit worthy consumers with "no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment." However, the chief executive of
Countrywide Financial, the nation's largest mortgage lender, is said to have "bragged" that to approve minority applications "lenders have had to stretch the rules a bit", suggesting that Countrywide was responsible for relaxing
its standards rather than the other way around.