Caberte, Jona B.

BSA-2

AC 509

MW 12:00-1:30

Crisis of Credit
1. The video gives a brief and visualized summary about credit crisis. Accordingly, credit crisis is
a worldwide financial disaster affecting everyone. This is how it works: credit crisis brings two
groups together homeowners who are represented their mortgages through their houses and
investors represented by their money through institutions. Credit crisis started with families
wanting to own houses and saved up for a down payment. They then contact mortgage brokers
who connect them to mortgage lenders. Housing prices at this point have been rising. Then the
lenders sell the mortgages to investors, who borrow millions of dollars to buy these mortgages,
which mean that every month these investors receive the payments from the homeowners. These
mortgages are then transformed into a collateralized debt obligation. They are split into 3
categories: Safe (AAA), OK (BBB), and Risky (not rated). The AAA rated securities can be
insured for a small fee called credit default swap and sold to investors that want a safe
investment. The other BBB rated securities can be sold to other bankers, and the Risky securities
could be sold to hedge funds. The investment banker could now repay his loans. Everyone in this
cycle makes money. This system worked for a mean time until all of the qualified potential
homeowners already had mortgages. Lenders then came up with a new idea. Since home prices
have historically always increased in value, they dont mind if homeowner defaulted because
they could still make money by selling these houses. Sub-prime mortgages came wherein
lenders add risk to new mortgages, such as not requiring a down payment, proof of income or
any documentation. No one in this business cycle cared about the risk because it was passed on
to the next person. Over time, mortgage payments turned into homes which resulted to increased
supply of homes and prices began to fall instead of rise. Existing home owners saw the value of
neighboring homes drop and would decide to default on their mortgages. This left the banker
with worthless homes and no investors buy them. Investors have a lot of devalued homes and
lenders cannot sell any new mortgages. Now, the lenders, bankers, investors and homeowners
investments all go bankrupt.
2.
The credit crisis could have been prevented if in the first place, they have proper
regulation of mortgage brokers, who used too much hedge fund and made the bad loans, and
hedge funds. They would have charged higher interest rates over the time which could have
directed to a stronger dollar and have made borrowing less attractive while saving more
attractive. Also, the housing subsidy policy for low-income households should have been
removed. This policy pushed people who could least afford to invest in property at the same time
having a great opportunity cost to the government. So, the financial crisis could have been
avoided by combining tighter monetary and fiscal policies, more vigorous financial regulation,
and greater controls over the credit rating agencies and the banking system.
3.
Obviously, there was no sufficient regulation of financial markets or institutions because
they did not impose significant adequate capital requirements that would qualify a family to buy
a house. In the first place, these homeowners are not even capable of paying their mortgages.
This left the banks ill prepared to withstand the losses which arose when the housing bubble
eventually burst, leading to a downfall in securitized loan values.

4.
Lenders are unable to lend further, even if they wish, as a result of earlier losses. An
overall lack of confidence or liquidity in the market developed, worldwide stock markets turned
down, corporate bond risk premiums soar, the global stocks record their worst, and the treasury
bills trade with negative yields. The things mentioned are some of the effects of credit crisis to
other markets. Yes, up until now we are still feeling some pinch from the credit crisis. According
to research, the ratio of household debt to after-tax income rose.
5.
In my opinion, there is remote possibility that the credit crisis which happened in the US
will also happen in the Philippines. Crunches, such as the credit crisis, are opportunities for
policy reforms that can be useful in the long term and our country has learned a lot from
financial woes that bought financial chaos in the US. Our country has implemented much needed
monetary and fiscal reforms and regularly reviewed fiscal policies to ensure stable economy. As
intellectual capacities are more and more focused on the financial whirl in the US, ideas for
greater stability of securities market, which is a strong economic indicator, will ensure that the
Philippines will be spared from this type of financial crisis.