One of the most discussed topics in finance recently is the global economic crisis that is said to have begun in the 2000s. Your professor instructed 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 global 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 these mortgages into pools and created securities that were backed by the mortgage payments. A portion of these pools were called tranches. Groups of tranches were further combined and then divided again into more complex securities called collateralized debt obligations (CDOs). These securities were redivided and recombined to create even more complex securities called CDOs-squared. 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 mortaage defaults led to the meltdown. Investors who were the indirect lenders to the home Summary Which statements belong in the summary? Check all that apply. 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. The total amount of risk embedded in the securities created by bundling mortgages did not change. The securitization and resecuritization processes led to a distribution of total risk among different types of collateralized securities. Securitizing companies, such as Merrill Lynch, Bear Stearns, and Lehman Brothers, were making money on the volumes of mortgage pools that they were securitizing. This encouraged originators to issue more mortgages and increase the total value of the mortgages. 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. 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. Investors were fully aware of the risks involved, yet still settled with low returns. O Regulations were relaxed, leading to nonqualifying mortgages getting approved for loans. O Home buyers opted for traditional fixed-rate mortgages to avoid any payment delinquency. Credit default swaps claimed to insure CDOs. One of the most discussed topics in finance recently is the global economic crisis that is said to have begun in the 2000s. Your professor instructed 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 global 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 these mortgages into pools and created securities that were backed by the mortgage payments. A portion of these pools were called tranches. Groups of tranches were further combined and then divided again into more complex securities called collateralized debt obligations (CDOs). These securities were redivided and recombined to create even more complex securities called CDOs-squared. 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 mortaage defaults led to the meltdown. Investors who were the indirect lenders to the home Summary Which statements belong in the summary? Check all that apply. 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. The total amount of risk embedded in the securities created by bundling mortgages did not change. The securitization and resecuritization processes led to a distribution of total risk among different types of collateralized securities. Securitizing companies, such as Merrill Lynch, Bear Stearns, and Lehman Brothers, were making money on the volumes of mortgage pools that they were securitizing. This encouraged originators to issue more mortgages and increase the total value of the mortgages. 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. 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. Investors were fully aware of the risks involved, yet still settled with low returns. O Regulations were relaxed, leading to nonqualifying mortgages getting approved for loans. O Home buyers opted for traditional fixed-rate mortgages to avoid any payment delinquency. Credit default swaps claimed to insure CDOs