RISK ASSESSMENT

Risk Assessment on Bank of America

Risk Assessment on Bank of America

Introduction

The number of banks and other financial institutions, in the past 10 years, that have offered loans to buy housing in the United States has increased dramatically. This kind of business has a very low yield credit rate for the final borrower that is not much greater than the cost of borrowed funds for the lending bank, in order to get a decent profit amount. Loans for housing (mortgages) was by sold trained managers and mortgage brokers in regional offices of banks. Both get a paid commission from the sale and were motivated to increase sales. Though, to achieve high sales volumes, some creditor banks and their vendors occupied a very aggressive stance in the market, and some even specialize in granting loans to people with low incomes and credit ratings. This type of loan is called sub-prime-lending. With many borrowers, this category consisted of contracts with lending to low-level fixed lending rate for the first two years, after which these rates have significantly increased. Many people who took out loans to buy housing, it was not versed in either finance or the financial products of banks, and could not properly assess how much their payments will increase in two years. People also do not know that interest rates in general can significantly increase in U.S. interest rates on loans are flexible and tied to the refinancing rate.

Background of Risk Assessment

Asset backed securities is a debt instrument and a special type of bonds that are issued in the form of loans for housing. They are also often called MBS (Mortgage Backed Securities). CDO (collateralized debt obligation) bonds with a special mechanism for repayment, in which all cash flows are received on SPV and is divided into several parts / tranches. Each tranche has a different return period and the order of maturity. Many banks and financial companies, lenders tried of not keeping loans on their books, they just resell them to larger creditor banks. That is, loans through a transit process and passed on, and profit from sales remained in the account. Therefore, little attention was paid to risk assessment and credit quality. All this happened in a booming real estate market, the U.S. economy was strong and interest rates were low. The greatest increase in the real estate market in the U.S. was showed in 2000-2005. Recently, however, the rate of inflation in the world began to grow, and many governments have to raise the refinancing rate, then real estate prices stopped increasing and even began to fall. At the same time, a 2-year grace period, repayment of many American borrowers was over, and they were faced with a significant increase in loan payments. As a result, the number of defaults on home loans has increased significantly. In 2007, the United States unprecedented wave of loan defaults and bank seizures of homes from borrowers, which filled the market houses for sale, putting more pressure ...