The house is the biggest asset for most of household; therefore, the price is real key and any adjustment in the admit sphere will affect the economy and the pecuniary markets. The existing crisis which has already flooded the entire economy is often referred to as subprime mortgage meltdown. The reason behind creating Government Sponsored Enterprises (Fannie Mae and Freddie Mac) was to avoid massive defaults in residential and commercial housing. attached that federal government took locomote to provide stability to the financial markets, mortgage availability and defend taxpayers.
The current decline of the securities industry is just a consequence, buttoned directly with the original issue of the f all(prenominal) of the United States housing system, which has passed through several stages, exposing market players and the government to new challenges and difficulties.
Primarily, it is important to understand the roots of the crisis, which consist in the boosting of the American housing. Given that with the beginning of the new millennium, the population?s income has risen dramatically, all financial institutions, eligible to provide housing loans, began to accept increasingly more critical moral hazards, i.e. began to lure those borrowers who were not adapted enough for such a huge loan. The frequency of principal-agent conundrum cases had also grown substantially.
In economics, ?the principal agent conundrum treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent? (Fukuyama, 1995, p. 54). This model can be good applied to the relationship between borrower and financial institution, in which the precedent conceals certain information about their spending plans and current financial situation and therefore are more likely to give off to return the loan. The popularization of housing loans subsequently caused the decline of try premiums: ?A study by the Federal Reserve indicated that the median(a) difference...
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