CONSUMER AND MORTGAGE LENDING

Consumer and Mortgage Lending

Table of Contents

Chapter 1: Introduction4

Background of the Study4

Significance of the Study7

Purpose of the Study8

Aims and Objectives8

Problem Statement9

Significance of the Study9

Chapter 2: Theoretical Framework10

Background theoretical framework11

Consumer mortgage choice30

HSBC: The Bearish Case37

General business, economic, political and market conditions37

Competition39

Operational risks40

Liquidity41

Introduction to Citi Group Case46

Re-Default Rates49

Foreclosures49

Liquidity crisis: commercial vs investment banks51

Causes of current crisis: digging deeper52

Financial innovation, emergence of subprime loans and housing bubble54

Capital market regulations and executive compensations60

Growth of credit default swaps64

High financial leverage and bank run72

Summary to the case of citi gropup73

Stock market volatility74

Chapter 3: Methodology81

Framework81

Elasticities83

Consumer Credit Models87

Methodological approach89

Choice of variables90

Ethical Concerns91

Survey instrument93

Example of conjoint instrument item93

Chapter 495

Discussion and Analysis95

Reliability and Validity Factors96

Capital market regulations and executive compensations97

Growth of credit default swaps100

Chapter 5: Conclusion104

Financial innovation, emergence of subprime loans and housing bubble105

Chapter 6: Recommendation110

References111

Appendix122

Consumer and Mortgage Lending

Chapter 1: Introduction

Background of the Study

Since 2001, there has been an upward trend in swinging of housing market while the falling of interest rates and the rising availability of mortgages combined with rising housing prices. The Federal Reserve (Fed) has direct control over two types of interest rate. The first, called the discount rate, is a rate charged by the Fed to banks for borrowing short-term funds directly from it, and is set by the Fed. The second is known as the federal funds rate (the interest for inter-bank loans), is a market rate at which banks charge each other overnight for funds they use to meet their reserve requirements and other liquidity needs.The paper evaluates the actions of the authorities that provided liquidity to the markets and failing banks and indicates areas where improvements could be made. (Johnson, et. al. 2005 Pp. 34),

Similarly, it examines the regulation and supervision during this time and argues the need for changes to avoid future crises. in recent years, the mortgage industry increasingly moved toward securitization (that is, packaging mortgages into securities and selling them into the secondary market, thereby shifting credit risk). This sweeping change provided the mortgage industry with greater liquidity, helping to make new loans accessible to more Americans at different levels of income than ever before. Banks failed and the financial system was strained for an extended period. The banking system as a whole was strong enough to take these entities onto its balance sheet in 2007-09, but the effect on the demand for liquidity had a serious impact on the operation of the money markets. The uncertainty associated with the scale of the losses that banks might face created a dislocation in the interbank markets. Banks would not lend to other banks for fear of the scale of counterparty risk. If borrowing banks had unrevealed losses they might not repay the funds that they borrowed from other banks. The market response was demonstrated by two other interest rate spreads By late 2005, it was becoming ever more apparent that credit was expanding too rapidly, on terms that were too loose. What began as healthy growth in mortgage originations and housing starts swiftly became a home price ...