Finanzkrise - Analysis and Reasons for the Subprime Crisis

Table of Contents

1 Introduction

2 Mortgage Backed Securities as a form of Asset Securitization

2.1 Structure and involved parties

2.1.1 Classification of mortgage backed securities

2.1.2 Property loan securitization

2.2 Versions of loan securitization

2.2.1 True Sale vs. synthetic forms

2.2.2 “Pass-Through” vs. “Pay-Through”

2.3 Appraisal of loan securitization of the view of credit institutions

2.3.1 Advantages for the bank

2.3.2 Disadvantages for the bank

2.4 Risks of securitization

3 Ratings of MBS

3.1 Rating process

3.2 Demand-Pool-asset backing for reaching a certain rating class

3.2.1 Internal credit enhancements

3.2.2 External credit enhancements

3.2.3 Critical appraisal of collateralization measures

4 Analysis and reasons for the subprime crisis

4.1 Definition of “Subprime”

4.2 Securitization- and US-property market

4.2.1 Origin and increase of the securitization market

4.2.2 Development at US-property market

4.3 Trend of interest rates in the US

4.4 Property loans in the US

4.4.1 Types of credits

4.4.2 Bank lending policy

4.5 Information asymmetries inside the securitization structures

4.6 Outbreak of the crisis by interaction of individual causes

5 Conclusion

Research Objectives and Themes

This thesis examines the underlying causes and mechanisms that led to the Subprime Crisis of 2007, focusing on the role of financial instruments like Mortgage Backed Securities (MBS). The primary objective is to analyze how the interaction between interest rate trends, housing price fluctuations, lax lending standards, and inherent structural information asymmetries contributed to the global economic collapse.

• The structure and classification of Mortgage Backed Securities (MBS) and Asset Securitization.
• The mechanics of credit enhancement and rating processes for structured financial products.
• The impact of US housing market developments and changing bank lending policies.
• The role of information asymmetries and principal-agent conflicts in securitization structures.
• The cumulative effect of individual economic causes leading to the outbreak of the crisis.

Excerpt from the Book

Summary of Chapters

1 Introduction: An overview of the Subprime Crisis, its impact on the global economy, and a roadmap of the thesis structure.

2 Mortgage Backed Securities as a form of Asset Securitization: Describes the structure, classification, and involved parties of MBS and loan securitization.

3 Ratings of MBS: Explains the rating process and various internal and external credit enhancement techniques used to bolster MBS security.

4 Analysis and reasons for the subprime crisis: Analyzes the interplay of interest rates, property markets, lending policies, and information asymmetries that triggered the crisis.

5 Conclusion: Summarizes the systemic consequences of the crisis and discusses the challenges for future financial regulation and risk management.

Keywords

Subprime Crisis, Mortgage Backed Securities, MBS, Asset Securitization, SPV, Credit Enhancement, Rating Agencies, Information Asymmetry, Interest Rates, Property Market, Predatory Lending, Principal-Agent-Problem, Financial Crisis, Liquidity Deficits.

Frequently Asked Questions

What is the core focus of this thesis?

The thesis analyzes the reasons behind the Subprime Crisis, specifically looking at how financial instruments were used to securitize high-risk property loans.

What are the central themes of the work?

The central themes include the mechanics of asset securitization, the function of credit rating agencies, US real estate market trends, and the systemic risks arising from complex financial structures.

What is the primary objective of this research?

The primary goal is to explain that the crisis was not the result of a single factor, but rather the cumulative effect of interacting economic forces over several years.

Which scientific methodology is employed?

The author employs an analytical review of securitization mechanisms, historical interest rate trends, and empirical data from the US property market to identify the catalysts of the crisis.

What topics are covered in the main section?

The main section covers the classification of MBS, the role of internal and external credit enhancements, definitions of "Subprime" borrowers, bank lending policies, and the information asymmetries between investors, arrangers, and originators.

How is this paper characterized by keywords?

The work is defined by terms such as Subprime Crisis, Securitization, MBS, Credit Enhancement, and Information Asymmetry.

How did "Ninja-Loans" contribute to the crisis?

Ninja-loans (No Income, No Job, No Assets) reflected a decline in lending standards, where banks issued loans to unqualified borrowers without proper verification, driven by an originate-to-distribute strategy.

What is the "waterfall principle" in MBS?

The waterfall principle refers to the subordination of instruments in different tranches, where interest and principal payments are distributed sequentially, placing the highest risk on the junior note holders.

What role did rating agencies play in the crisis?

Rating agencies contributed to the crisis by assigning high ratings ("AAA") to complex, high-risk tranches, which misled investors and obscured the underlying poor quality of the mortgage assets.