Subprime Mortgage Crisis Quiz: Trivia!

Sub-prime lending refers to the practice of lending money to individuals who do not meet the usual criteria for a mortgage. These individuals often have lower credit scores or unstable financial situations, making them a higher risk for lenders. Sub-prime lending became more prevalent leading up to the 2008 financial crisis, as lenders sought to expand their customer base. However, it also contributed to the housing market collapse and subsequent economic downturn.

Henry Paulson was the Secretary of the U.S. Treasury when this crisis occurred.

The reason why it seemed that no one was concerned about the riskiness of lending to people who usually would not qualify for a loan is because each person involved in the lending process was transferring the risk to someone else through various financial instruments like CDO's (Collateralized Debt Obligations). This means that the risk was being passed along the chain, making it appear as if no one was taking responsibility for it.

A "safe" collateralized debt obligation (CDO) is one that is backed by low-risk assets, such as high-quality mortgages. These CDOs typically receive the lowest return for the investor because they offer lower yields compared to riskier CDOs. This is because the risk associated with the underlying assets is lower, resulting in lower potential returns for the investor.

The correct answer is "All of the above". The fact that home values had historically always been rising led lenders to become more lenient in their lending practices. They allowed borrowers to purchase homes with no down payment, which increased the risk of default. They also stopped requiring proof of income, making it easier for people with unstable financial situations to obtain loans. Additionally, lenders started lending to less responsible people, who may not have had a good credit history or a stable source of income. All of these risky behaviors were a result of the belief that home values would continue to rise.

The system of packing mortgages into a box and slicing it up into 3 different parts and selling them to investors depended on both A and B to be successful. If people who took out loans were able to pay them back, it ensured that the investors would receive their returns. Additionally, if house prices continued to increase, as they historically have, it would further benefit the investors by increasing the value of the mortgage-backed securities. Therefore, the success of the system relied on both factors.

An individual would get a mortgage for a home. A mortgage is a loan that is used to purchase a property, typically a house or a condominium. It allows individuals to borrow money from a lender, usually a bank, to finance the purchase of a home. The borrower then repays the loan over a specified period of time, usually with interest. Therefore, getting a mortgage is a common way for individuals to obtain the necessary funds to buy a home.

When homeowners default on their mortgage payments, the banker receives the home. This means that the ownership of the property is transferred to the bank as a form of collateral for the unpaid mortgage. This allows the bank to recover their losses by selling the home to repay the outstanding debt.

Leverage works by allowing investors to borrow money to make investments. By borrowing more money, investors can increase their purchasing power and potentially generate larger returns on their investments. This is because they can use the borrowed funds to acquire more assets or make larger investments, which can lead to higher profits if the investments perform well. However, it is important to note that leverage also amplifies losses, so it carries a higher level of risk.

When many neighbors default on their mortgages and put their houses up for sale, it creates an oversupply of houses in the market. This increased supply leads to a decrease in demand for houses, causing the prices to drop. As a result, even though homeowners who are paying their mortgages on time are being responsible, the value of their homes still goes down due to the overall market conditions.

The financial incentive that has led to so many foreclosures is that the home is worth less than the amount of the mortgage. This means that homeowners owe more on their mortgage than the current value of their home, making it difficult for them to sell the property or refinance their loan. As a result, many homeowners are unable to keep up with their mortgage payments and end up facing foreclosure.

During the week following the Lehman Brothers collapse, the CEO's of major banks were called to Washington because credit markets froze. The Treasury Secretary forced the banks to take TARP money from the federal government and make the government part-owner of the banks. This was done in order to stabilize the financial system and prevent further collapse.

Ken Lewis is the correct answer because he was the CEO of Bank of America. During the financial meltdown, Lewis played a significant role in managing the crisis and making crucial decisions for the bank. He led Bank of America through a challenging period and implemented strategies to stabilize the company amidst the economic turmoil.

Adjustable rate mortgages were damaging to the housing bubble because home prices did not increase as expected. This meant that when the mortgages reset to higher percentages, people's monthly house payments increased significantly. This put a strain on their finances and made it more difficult for them to afford their homes. Additionally, the uncertainty of rising interest rates led many people to sell their homes and move into apartments, further contributing to the housing bubble. Therefore, both factors A and B played a role in the damaging effects of adjustable rate mortgages.

The announcement of the big bank merger involving Bank of America by Monday morning in September was important to prevent a collapse of the U.S. financial system. This is because the merger would help stabilize the banking sector and restore confidence in the financial markets. Additionally, announcing the merger would also offset the negative news about Lehman Brothers going bankrupt, which could have further destabilized the financial system. Therefore, the correct answer is Only A & C.

A credit default swap is a financial instrument that allows investors to transfer the risk of default on a specific bond or loan to another party. By purchasing a credit default swap, a mortgage investment instrument can obtain a high bond rating, which makes it more attractive to investors. This, in turn, makes the top CDO slice appear as a safe investment option for investors. Therefore, the purpose of a credit default swap in this context is to enhance the perceived safety and attractiveness of a mortgage investment instrument.

Investors began to look away from safe, traditional investments like U.S. Treasuries because the Fed lowered rates so low that it wasn't a decent enough return on their investment, and the pool of money available had grown faster than safe investments had.

The housing bubble was fueled by multiple factors. Builders having access to funds from financial institutions allowed them to build more homes, increasing the supply and contributing to the bubble. Easy money policies from the Federal Reserve made it easier for people to borrow money, leading to increased demand for homes. Money flowing into America from fast-growing economies also contributed to the housing bubble by increasing demand. Additionally, government policies encouraging homeownership, such as tax incentives and relaxed lending standards, further fueled the bubble. Therefore, all of the options provided - I., II., III., & IV. - played a role in fueling the housing bubble.

Bank of America had a reputation of being an outsider to Wall Street, more of the Wal-Mart of banking. This suggests that Bank of America was perceived as a company that operated differently from traditional Wall Street banks, similar to how Wal-Mart operates differently from other retailers.

Merrill Lynch would have been the next domino to fall after Lehman Brothers and needed to be rescued during the weekend in September 2008. This is because Merrill Lynch was heavily exposed to the subprime mortgage crisis and faced significant losses. As a result, the company's financial stability was severely compromised, leading to the need for a rescue or bailout.

This statement is false because lenders are actually more likely to have begun foreclosure proceedings on subprime adjustable rate mortgages compared to traditional mortgages.

Washington D.C. is the correct answer because it is the location of the Federal Reserve, which is the central banking system of the United States. The Federal Reserve has significant power and influence over the U.S. banking system, as it is responsible for setting monetary policy, regulating banks, and maintaining the stability of the financial system. While Wall Street is a major financial center, it does not have the same level of centralized power as Washington D.C. North Carolina, specifically Bank of America's headquarters, may be a significant player in the banking industry, but it does not represent the overall power in the U.S. banking system.

Increasing interest rates can be considered a cause of the financial crisis. When interest rates rise, it becomes more expensive for individuals and businesses to borrow money, which can lead to a decrease in spending and investment. This can have a negative impact on the economy and potentially contribute to a financial crisis. Therefore, the given answer is incorrect.

The given statement is false because it claims that the financial crisis is not the fault of the financial institutions and that they acted responsibly and with caution. However, it is widely acknowledged that the financial crisis was caused by a multitude of events, including the risky behavior and irresponsible actions of financial institutions. The crisis was not simply a result of bad luck, but rather a consequence of systemic failures and poor decision-making within the financial industry.