One of the most discussed topics in finance recently is the global economic crisis that is said to have begun in the 2000 sour in your team to write an article for the college newspaper. Your friend has written the first draft of the article, which captures the essence of the globa economic crisis. She has left some important points for you to review and has asked you to check the summary. THE GLOBAL ECONOMIC CRISIS Mortgage originators issued mortgages to home buyers and sold these mortgages to securitizing firms. These firms bundled obligations (CDOs). These securities were redivided and recombined to create even more comples securities called This process had important implications: (1) The total risk embedded in the mortgages did not change; (2) since the risk was spread amongst several CDOs, it was difficult to assess the risk in each CDO; and (3) during the process of securitization and resecuritization, financial institutions earned fees and were thus encouraged to continue this process. These securities were sold to investors across the world. If all went well, home buyers would make their payments and investors would earn their returns. However, a series of mortgage defaults led to the meltdown. Investors who were the indirect leners home buyers didn t receive the expected cash flows, and on top of that, financial institutions skimmed fees during the process. Which statements belong in the summary? Check all that apply. From a borrower's perspective, adjustable-rate mortgages (ARMs) are considered riskier than traditional fixed-rate mortgages, because mortgage payments might increase without an increase in income. Investors across the globe were buying mortgage-backed securities for the rate of return that these securities were generating. Most of these investors chose to be ignorant of the risks involved in such investments. Borrowers who met certain requirements for mortgages, such as minimum income level relative to the total mortgage amount, could obtain mortgages that were qualified to be securitized. Such mortgages were called subprime, or Alt-A, mortgages. In the 2000s, specialized mortgage brokers were allowed to originate mortgage loans. Earlier mortgage loan originators were Savings \& Loan associations (S\&Ls) or banks. Factors that caused the financial crisis Analysts and theorists have debated over the different factors that caused the subprime mortgage meltdown. According to your understanding of the crisis, which of the following factors led to the financial crisis? Check all that apply. Home buyers opted for traditional fixed-rate mortgages to avoid any payment delinquency. Regulations were relaxed, leading to nonqualifying mortgages getting approved for loans. Credit default swaps claimed to insure CDOs. The Fed kept interest rates low to encourage home ownership
