Pantino, Steffi Kay D.

BSA 2

AC509| MW | 7:30 9:00

THE CRISIS OF CREDIT

In the video, there is an increase in demand for mortgage as investors (collateralized debt obligation holders), so pleased with their gains, ask the investment banker for more, and the banker in turn asks the mortgage lender for more mortgage. However, the lender cant find any as everyone who qualifies for a mortgage already has one. So the lender resorts to lowering the qualifications in the anticipation that in the event of a default, the lender the holder of the mortgage loan, gets a house that is rising in value. Mortgages become riskier and riskier. The system works out for a while, everyone gets money until eventually, the sub -prime borrowers have to start paying back not only the interest but also the principal. Unable to pay, they default. At first, things are not so bad, the mortgage owners (bankers, investors, etc.) kick out the inhabitants and get some houses that are rising in value. But, more and more subprime mortgages default, to the point where there are so many available houses on the market that they begin to plummet in value. The banker needs to sell the CDO to the investors to pay back all of the money he borrowed to buy it. But they dont want it. They already own thousands of CDOs that are plunging in value. Everyone gets paranoid because no one knows who has CDOs or how many. Banks and institutions stop buying or lending anything, and start running out of money...and going bankrupt. What just happened is what you would call a credit crisis. This so-called credit crisis brought two groups of people together: the homeowners and the investors. Through the financial institutions, these two groups were able to interact with each other. With this, one could say that if it werent for the financial institutions, there would be no credit crisis because the financial institutions were the ones that brought the homeowners and investors together. They acted as a channel or medium for the two groups to deal with each other. What pushed the financial institutions to do such action is leverage. The prevention of credit crisis if one finds prevention rather too impossible, one other way to put it would be the lessening of credit crisis would have been made possible through government interference. Better monitoring and better regulation in the financial sector would have done the trick. If there had been sufficient regulation, credit crisis would never have happened. Credit crisis caused a number of large banks who once thought too big to fail to declare bankruptcy. The whole financial system is frozen - those large banks arent the only ones going bankrupt, but everyone is. Everyone is affected.

Today, credit crisis is still prevalent. Bankruptcy is happening at various points in the globe. Every now and then, tons of banks are closing and everyone is losing a lot of money. It is very possible for credit crisis to happen in the Philippines. Take Cebus case for instance. Right now, there is a great demand for housing. The population is increasing and more and more people from other provinces move to Cebu. There is a boom in the real estate market. If the government does not give much attention to the emerging trends and what these might imply in the future, then we could be in the same scenario.