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Lecture

Week 10 - Confederation Life and RBC

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Department
Administrative Studies
Course
ADMS 1010
Professor
Yong Troy
Semester
Fall

Description
Week 10Confederation Life and RBC ADMS 1010TroyPart IIUS SubPrime Mortgage Crisis st After the dotcom bubble burst in the early 21 century interest rates were kept extremely low to encourage investment Financial service companies now able to merge and offer a diversity of products saw opportunity Low interest rates encouraged home ownership Readily available credit made it easy for people to buy homesPeople who previously could not afford a home of their own rushed to do so This influx of consumers driven by easy credit drove up housing prices Others seeing the value of their homes going up saw this as a buffer to debt and started to spend money in other areas buoyed by an inflated financial worthBanks contributed to this frenzy by not properly assessing risks associated with some of these mortgages not doing their due diligence on the inflated housing prices or the ability of the borrower to pay back the mortgage should the rates change A proper regulatory regime could have prevented such risky behaviour Most decision makers did not recognize the risk that was being placed on financial markets because of this lack of oversightThis was in part based on the assumption that home prices would not fall dramatically But prices did fall Soon people found themselves owing to the bank more money than their house was worth It made more financial sense for them to walk away from their investment than to continue to pay This left the banks and other lenders holding a large number of undervalued assets which accounted for large financial losses to the banks Basically the banks had bet that housing prices would continue to rise and that people would continue to pay their mortgages They were wrong The US financial crisis inquiry commission reviewed the crisis and in early 2011 determined that o The crisis was avoidableo Failure in oversight by the Federal Reserve contributed to the crisiso Breakdowns in corporate governance and taking on too much risk for short term financial gain occurred
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