Chapter 14

The Collapse and Recovery Prospects of the Asset Securitization Market

During the heydays of subprime mortgages in the mid-2000s, there were already concerns about their inherently high credit risk.1 Unfortunately, the market paid no attention to these concerns and the party of originating vast amounts of subprime mortgages continued. By early 2007, when the Federal Reserve had already hiked interest rates for three years that exerted great downward pressure on housing prices, subprime mortgages started to experience significantly higher than anticipated delinquencies and defaults. By mid-2007, several leading originators suffered heavy financial losses and declared bankruptcy for having originated voluminous subprime mortgages that could only be sold at substantially discounted prices. By the end of 2007, the subprime mortgage market collapsed.

The subprime mortgage market was doomed to collapse for one fundamental reason: deteriorating mortgage underwriting standards. The escalating interest rates and the burst of the housing price bubble in early 2007 only hastened and exacerbated the unavoidable disaster of subprime mortgages. Most unfortunate, the securitization process, which by itself is a neutral financing method of bridging borrowers and investors, spread widely the negative impact of subprime mortgages onto the entire market. The collapse of the asset securitization market ultimately brought down the entire financial market, which in turn slowed economic activity ...

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