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Bachelor Thesis, 2008. 78 Pages, Grade: 1,2. List of Figures. List of Abbreviations. 1.1 Motivation and Objective. 1.2 Course of the Investigation. 2 Fundamentals of the Subprime-Crisis. 2.1 The US Housing and heroes introduction Subprime Mortgage Market. 2.2 Characteristics of Subprime Mortgages. 2.3 Business Model of US Mortgage Brokers. 2.4 Financial Instruments Underlying the Subprime-Crisis. 2.5 Consequences of the Fragmented Securitization Process. 3 The Development of the Subprime-Crisis. 3.1 Situation of the US Housing Market up to 2007. 3.2 Timeline of the importance of education Subprime-Crisis in 2007. 3.3 Spillover Effects from the Mortgage Market to the Global Capital Markets. 3.4 Consequences for the British Banking Market. 4 Empirical Analysis About the Subprime-Crisis. 4.1 History and Overview of Event Studies. 4.2 Framework of an Event Study. 4.3 Selection of Relevant Data. 4.3.1 British Banks and Market Index. 4.3.2 News about Private Financial Institutions and Central Banks. 4.4 Event Study About the Subprime-Crisis. 4.4.1 Event Study Methodology. 4.4.2 Formulation and Testing of Hypotheses. 4.4.3 Interpretation of Results. 4.5 Year-round Performance of the British Banking Sector in 2007. 5 Summary and Conclusion. Figure 1: Development of the US mortgage market 2001-2006. Figure 2: Example of heroes introduction, a typical subprime MBS. Figure 3: New one family houses sold per month in the US. Figure 4: Funding of Northern Rock. Figure 5: Gross mortgage lending in the UK. Figure 6: Performance of FTSE 350 and FTSE 350 Banks in Career and Setting Goals Essay 2007. Figure 7: Distribution of events. Figure 8: Performance of FTSE 350, FTSE 350 Banks, and alternative portfolio. Figure 9: Federal funds target rate 2000-2008. Figure 10: S&P/Case-Shiller® Home Price Index 2000-2007. Figure 11: Development of the Dow Jones Industrial Index in 2007. Figure 12: Bank portfolio’s and alternative portfolio’s betas in 2007. Table 1: The top US subprime mortgage originators in 2006. Table 2: Relevant companies for essay the event study. Table 3: Categories of news about private financial institutions. Table 4: Categories of news about central banks. Table 5: Summary of the and disadvantages event study hypotheses. Table 6: CAARs of 3-day and 5-day event windows. Table 7: Timeline of the subprime-crisis in 2007. Table 8: CAARs after positive events for different estimation periods. Table 9: CAARs after negative events for different estimation periods. Table 10: CAARs after positive events for different event windows. Table 11: CAARs after negative events for different event windows. Table 12: Average abnormal returns after positive events by company. Table 13: Average abnormal returns after negative events by essay introduction company. Table 14: Average abnormal returns after positive events by news category. Table 15: Average abnormal returns after negative events by news category. Table 16: Portfolio characteristics in pest control 2006. Table 17 Additional constraints for the alternative portfolio. Table 18: Returns, betas, and weights of FTSE super sectors in 2006. Table 19: Characteristics of heroes essay, bank portfolio and was east germany alternative portfolio in 2007. illustration not visible in this excerpt. The US subprime-crisis became a headline in heroes introduction the global media starting in February 2007 after the US housing market had already shown first signs of a slowdown in late 2006 (DiMartino & Duca, 2007, p. 1). Previously, the US housing market had enjoyed a favorable environment, especially from Education, 2002 to 2005, which was characterized by low interest rates, rising house values, and increasing home financing possibilities through subprime mortgages (Krinsman, 2007, pp. 13-14). However, more and more events were published during the year by US mortgage brokers, international investment banks, and central banks around the world that presented a picture which caused today’s perception of the subprime-crisis. Heroes Essay? What’s more, the subprime-crisis is far from being over: an end to advantages control, the crisis is not yet in sight. One rather unique characteristic of this crisis is that its actual basis is the delinquencies and defaults of subprime single-family home mortgages in heroes essay the US (Kiff & Mills, 2007, p. Development Essay? 3) which is heroes introduction commonly not regarded to communist, be of heroes, great relevance for the international capital markets. However, taking into account the originate and importance of education distribute business model of US mortgage brokers in essay connection with the securitization of these mortgages into various types of germany, securities that are traded on a global basis, it is not surprising to observe that banks and investment funds around the world were invested into these securities. Before the crisis started, only a few banks or funds considered the liquidity of these securities when investing significant amounts of money in them because they focused on maximizing their returns. Heroes? But, when larger problems in the US subprime mortgage market became evident, liquidity became the major concern for investors and investor preferences significantly shifted to In Developing Countries Essay, safer assets such as government bonds (Fender & Hördahl, 2007, pp. 9-11). Essay Introduction? This caused severe problems in the money market, which ultimately brought the crisis across the conquered the aztecs. Atlantic to Europe. Heroes Essay? Moreover, funding problems emerged and was east communist caused the first bank run in heroes Europe in decades when depositors in Britain started to queue outside Northern Rock branches for hours to withdraw their deposits in and disadvantages pest light of heroes, fears that the bank might have to file for Career Development Goals Essay bankruptcy (The Economist, 2007a, para. 28). In addition, another British bank had been in the spotlight earlier that year because HSBC was the first European bank to announce a billion dollar write-off linked to its exposure to essay, subprime mortgages. Taking into consideration the subprime-crisis-related events in advantages pest control Europe, the British banking market can be characterized as the only banking market in Europe where the subprime crisis caused banks to substantially write down subprime-related assets on the one hand but where severe funding problems even led to introduction, a bank run that had to be bailed out by the central bank and the government on germany, the other hand. Consequently, the British banking market can be considered to be the European banking market with the highest impact of the heroes essay introduction subprime-crisis and is, therefore, worth analyzing in detail. The objective of this thesis is to discuss the reasons for Development and Setting Goals Essay the emergence of the essay introduction subprime-crisis and to empirically examine whether the subprime-crisis had an impact on the British Banking sector. The empirical analysis consists of two different approaches whereas an event study measures the short-term impact of certain news. The performance of the communist British banking sector in the full year 2007 is heroes essay introduction analyzed in a second approach that focuses on the long-term impact of the subprime-crisis. Advantages And Disadvantages Pest? In addition, the paper provides an overview on the development of the heroes essay subprime-crisis in 2007 based on a detailed description of the underlying fundamental market characteristics. In order to empirically measure the impact of the subprime-crisis on British banks, an event study will be conducted. Event studies are a widely-used empirical methodology in economics and finance to examine the impact of certain events: they are considered to Education, be the standard method to measure security price reactions (Binder, 1998, p. Heroes Introduction? 111). An event study is an empirical study that measures if specific events have a significant impact on certain stock prices by calculating abnormal stock returns around predefined events. In this regard, an abnormal return is the difference between the actual return in the market and was east germany the expected return according to a return generating model (Peterson P. P., 1989, p. 36). A common assumption in this regard is that positive events lead to positive abnormal returns whereas negative events cause the heroes essay introduction abnormal returns to be negative. Consequently, important news relating to advantages, the subprime-crisis will be categorized as positive or negative and heroes its impact on stock returns will be determined. The event study, as well as the Development and Setting Goals Essay timeline of the subprime-crisis, include events from January 1, 2007 to December 31, 2007. The analysis of the year-round performance of the British banking sector in introduction 2007 is conducted in addition to the event study and follows a different methodology. In contrast to the analysis of the impact of individual events, this approach deals with the performance of British banks and diabetes american compares this to the performance of an alternative non-bank portfolio. Key to this analysis is that both portfolios have the same risk and return characteristics at heroes, the beginning of 2007 that have been determined through a backtesting of the portfolios’ performance in 2006. In the second chapter, important fundamentals of the subprime-crisis will be examined. These fundamentals explain how an environment was able to develop in the last decades that lay the foundation for today’s crisis. In Chapter 2.1, an overview about the development and the structure of the importance of philosophy US subprime mortgage market will be presented before specific characteristics of subprime mortgages will be outlined in 2.2. The unique business model of mortgage brokers is depicted subsequently. The last segments of Chapter 2 specify complex financial instruments that enabled the subprime-crisis to spread around the world and explain why the securitization process leads to high-risk securities. Chapter 3 specifically describes the development of the subprime-crisis in 2007. Heroes Essay? After presenting an overview about the situation of the US housing market up to Career Goals, 2007 in 3.1, a timeline about heroes, last year’s subprime-crisis is outlined in 3.2, and the impact on international capital markets is discussed in Career Goals Essay 3.3. Chapter 3.4 focuses on the consequences for British banks and the actions of the British financial regulatory environment. An empirical analysis of the subprime-crisis is conducted in Chapter 4. A general overview about event studies and their historic development is presented in heroes introduction 4.1. In African American? After deducing the typical framework of an event study in heroes essay 4.2, the relevant British banks in line with its market index as well as relevant news for In Developing Countries the event study are determined in Chapter 4.3. The actual event study that analyzes the heroes impact of the subprime-crisis on British banks will be presented in Chapter 4.4. Additionally, a comparison of the performance of of philosophy of education, a bank portfolio with an alternative non-bank portfolio is given in 4.5. Finally, Chapter 5 contains a summary of the theoretical concepts and the empirical results and gives an outlook about a potential development of the heroes essay subprime-crisis, capital markets, and specifically the British banking market. Ideas for further research are also presented. 2 Fundamentals of the importance Subprime-Crisis. 2.1 The US Housing and heroes Subprime Mortgage Market. Subprime mortgages are a common way to this conquered, finance home ownership for people that did not have the essay possibility of getting a prime mortgage in the past (Dynan & Kohn, 2007, p. 26). Conquered? These mortgages are loans for residential property which have a higher probability of delinquency and default than prime loans. Major differences regarding the characteristics of the loans are that upfront costs such as application and appraisal fees as well as continuing costs such as principal and interest payments are higher for subprime mortgages (Pennington-Cross, 2003, pp. 279-280). The differentiation between prime and subprime borrowers is usually made on the basis of the borrower’s credit rating which is introduction usually determined by their credit score as well as loan ratios such as the debt service-to-income (DTI) ratio and the mortgage loan-to-value (LTV) ratio (Kiff & Mills, 2007, p. 3). The LTV ratio refers to the size of a mortgage lien as a percentage of the total house value (Brueggeman & Fisher, 2008, p. 145), whereas the DTI ratio measures the percentage of the and Setting Essay borrower’s monthly gross income used to service the heroes essay introduction mortgage (Bhattacharya, Fabozzi, & Chang, 2001, p. 5). Fair, Isaac and Company established the widely used FICO credit score for importance of philosophy of education mortgage borrowers that assigns a credit score to each borrower based on the probability that the borrower’s mortgage will default or that the borrower will become significantly delinquent (Frankel, 2006, pp. 69-70). These FICO scores range between 400 and 900 points (Taff, 2003, p. 121). Typical subprime mortgages are mortgages of heroes, borrowers with low FICO scores below 620, a DTI of more than 55 percent and a LTV of diabetes in african american, more than 85 percent (DiMartino & Duca, 2007, p. 4). Besides these rather objective criteria, it was discovered that borrowers who had subprime mortgages in the past are likely to heroes introduction, only be able to receive subprime mortgages in the future even though their credit rating might have improved (Courchane, Surette, & Zorn, 2004, p. 381). Mortgages with a higher credit quality than subprime mortgages but with a lower quality than prime loans are referred to as Alternative A loans (Alt-A) loans. These mortgages are often characterized as being obtained from borrowers who do not provide the mortgage lender with full documentation about their credit history and current income (Kiff & Mills, 2007, p. 3). In 2006, 81 percent of all Alt-A mortgages were sold without complete documentation, whereas only 50 percent of all subprime loans were originated without being fully documented (DiMartino & Duca, 2007, p. 4). Moreover, Alt-A mortgages are widely used by diabetes investors to finance property that will be rented to third parties (Ashcraft & Schuermann, 2007, p. 20). The fourth mortgage category, which is in addition to prime, Alt-A, and subprime, is jumbo mortgages. In general, jumbo mortgages have the same characteristics as prime mortgages. The only introduction, difference between prime and communist jumbo mortgages is the size of the mortgage principal. Heroes Introduction? Jumbo mortgages are defined as mortgages of prime quality with a principal above $417,000 (Ashcraft & Schuermann, 2007, p. 7). Due to the high level of similarity of prime and jumbo mortgages, this thesis will not examine jumbo mortgages in detail. Kiff and Development Essay Mills (2007, p. Introduction? 3-4) present an of biological pest control, overview about the historic development of the current US subprime mortgage market. The first factor that led to the emergence of the subprime mortgage sector was the imposing of interest rate caps in 1980. Heroes Introduction? One major milestone was a change in Education Essay the legal environment that introduced adjustable-rate mortgages (ARM) in 1982. The 1986 Tax Reform Act strengtend the subprime mortgage markets as the act abolished tax deductions of interest payments of all consumer loans except residential mortgages. As a consequence, residential mortgages were the only type of introduction, loans available to consumers of which the interest payments could be deducted from Development and Setting, tax payments. Mortgage loans were now prefered to heroes essay introduction, other forms of consumer loans for home improvements and other personal consumer spending because high-cost mortgages became effectively cheaper than consumer loans (Chomsisengphet & Pennington-Cross, 2006, p. 38). In addition to Career Development and Setting, legal and regulatory changes that influenced the mortgage market, advances in the financial services industry also promoted subprime mortgages. Advanced computer models were developed, which led to introduction, a more cost-efficient mortgage origination process for banks. Moreover, standardized credit scores were introduced in the mortgage market after they were succesfully used in this conquistador the auto loan market to provide an objective view on borrower’s credit risk (DiMartino & Duca, 2007, p. 2). The securitization process, which will be described in detail in part 2.4, enabled banks to distribute credit risk off its own balance sheet and, consequently, led to the emergence of specialized mortgage brokers who offered mortgages without taking the total credit risk. The increasing demand for high-yielding residential mortgage-backed securitized products led to incentives for mortgage brokers to offer risky mortgages because investors were seeking high-yielding assets (Schumer & Maloney, 2007, p. 20). Moreover, the very low interest rate levels in the US which resulted from the burst of the internet buble in introduction 2000 and the 9/11 terrorist attacks in 2001 made mortgages in general more attractitive as the Federal funds target rate, the Education Countries Essay US prime interest rate determined by the Federal Reserve System (Fed), decreased from 6.5% in 2001 to 1.0% in 2003 (Ashcraft & Schuermann, 2007, p. 7; Appendix A, Figure 9). In line with the low interst rates during this time, housing prices across the heroes introduction US continously increased, enabling borrowers to refinance their mortgages and of philosophy extract equity from from these loans (Chomsisengphet & Pennington-Cross, 2006, p. 41). These numeorous factors supported the heroes essay establishment of the diabetes subprime mortgage market in the mid ‘90s and enabled more people, who had not been ab able to get traditional mortgage financing in the past, to own homes. Due to essay, the rising house values and relatively low interest rates, the homeownership rate enjoyed tremendous growth in the US, with its highest value of 69 percent, in 2004 (Garriga, Gavin, & Schlagenhauf, 2006, p. 398). Real home prices increased by almost 85 percent from 1997 to the aztecs., 2006 and the S&P/Case-Shiller® Home Price Index shows an acceleration of the annual increases of home prices up to 2006 (Appendix A, Figure 10). The annual home price increase was 8.5 percent in 2001 and rose to more than 15 percent in introduction 2005 (Schumer & Maloney, 2007, pp. 2-3). Was East Communist? Along with a high homeownership rate, delinquencies of subprime mortgages were at very low levels during 2004-2005 (Krinsman, 2007, p. 13). The market shares of heroes essay, different types of mortgage loans have significantly changed in the last decade. Most originated mortgages were so-called “prime conforming” loans until 2003 which were purchased by the government-sponsored enterprises (GSEs) Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) in this conquistador accordance with its very strict conforming criteria and later on guaranteed, securitized, and resold to investors. The strict GSE criteria include narrow characteristics regarding the size of the mortgage and are only available to borrowers with a good credit score who can also provide full documentation of their income. GSE mortgages are capped at heroes, $417,000 for single-family houses and stringent criteria regarding DTI and LTV ratios and proof-of-income documentation apply (Kiff & Mills, 2007, p. 6). By 2006, more than 50 percent of all mortgage originations could not be purchased by GSEs due to a lack of accordance with its strict conforming criteria. In line with the declining market share of prime conforming loans, subprime loans were more and more originated. This Conquered? Subprime mortgages only made up about nine percent of the total mortgage market in 2001 and its market share stayed constant until 2003. But looking at heroes, recently originated mortgages presents a different picture. Advantages Of Biological Pest Control? The share of subprime and Alt-A mortgages from all newly-originated mortgages increased from nine percent in 2001 to 20 percent in 2006 (DiMartino & Duca, 2007, p. 2). The following figure also shows that the percentage of subprime mortgages which have been securitized strongly increased from 50 percent in 2001 to 81 percent in heroes introduction 2006. Figure 1: Development of the importance of education US mortgage market 2001-2006. illustration not visible in this excerpt. Adapted from Schumer and Maloney (2007, p. Essay Introduction? 10) 2.2 Characteristics of advantages and disadvantages, Subprime Mortgages. In recent years, a wide array of subprime and Alt-A mortgages were offered in the US. Almost all of heroes introduction, these mortgages were hybrid loans that incorporated floating as well as fixed interest rates. Approximately two-thirds of these mortgages were so-called “2/28” mortgages that are structured as a fixed-rate mortgage (FRM) in the initial two year period and conquered the aztecs. then revert to an ARM in the subsequent 28 years (Kiff & Mills, 2007, p. 8). The floating rate during the ARM period is usually reset every six months on the basis of a predefined benchmark such as the heroes introduction London Interbank Bid Offered Rate (LIBOR) or other benchmark interest rates plus a margin (Schumer & Maloney, 2007, p. 2). The margin is typically between 400 and 600 basis points (Krinsman, 2007, p. 15). The fixed rate is Countries Essay usually set below market interest rates to attract borrowers to heroes essay, the mortgage: it is therefore known as a teaser rate. Borrowers with these mortgages are subject to a substantial increase in interest payments when the mortgage converts from low fixed rates to higher floating rates. This characteristic can be diminished through the incorporation of interest rate caps but the rise of the interest rate is still substantial in most cases (Ashcraft & Schuermann, 2007, p. Advantages? 22). Essay Introduction? Moreover, most subprime and Alt-A ARMs are structured as interest only (IO) and negative amortization (neg-am) mortgages in the first years of the mortgage. In IO mortgages, the borrower only In Developing Countries, pays the interest accruals in heroes essay introduction the first years and begins to pay down the principal after that period. In African American? In neg-am mortgages, the borrower only pays a part of the interest accruals in the first years. Heroes Essay Introduction? After this period ends, the diabetes in african american borrower has to pay down the principal and additionally the interest payments including the remainder of the accrued interest of the neg-am period (Kiff & Mills, 2007, p. Heroes? 8). The level of interest rates for all mortgages depends heavily on the credit history of the borrower and to some extent the mortgage’s LTV. Borrowers with high FICO scores are regularly subject to the lowest interest rates. The interest rates for mortgages with similar FICO scores but different LTVs are relatively similar except for LTVs greater than 100 when significant premiums have to Education Essay, be paid by the borrower (Chomsisengphet & Pennington-Cross, 2006, pp. 48-49). Another important characteristic of subprime mortgages are prepayment penalties. The share of subprime mortgages with prepayment penalties substantially increased in the last two decades and heroes essay about 80 percent of all ARMs that originated between 2000 and diabetes in african american 2002 include a prepayment penalty whereas this holds true for only 45 percent of heroes essay, all FRMs (Chomsisengphet & Pennington-Cross, 2006, p. 53). Prepayment penalties often last over a three or more year period and Goals Essay exacerbate the prepayment of heroes, mortgages as they can cost five percent or more of the Education Essay mortgage balance. As a result, these borrowers cannot achieve lower home funding by refinancing their mortgage in times of decreasing interest rate levels or improvements in their credit ratings (Schumer & Maloney, 2007, pp. 21-22). The main reason for the introduction of prepayment penalties is derived from the fact that most subprime mortgages are securitized into mortgage backed securities (MBS). The value of these MBS is significantly affected by introduction mortgage prepayments because prepayments cause changes in the duration of the MBS (Mason & Rosner, 2007, pp. This Spanish Conquistador The Aztecs.? 17-19). 2.3 Business Model of US Mortgage Brokers. The US mortgage market can be regarded as being separated by prime and non-prime mortgages. This separation especially applies to the institutions that are involved in heroes these markets. The prime mortgage market is dominated by the GSEs because they define the prime conforming criteria which have to be met in of philosophy of education order for prime loans to essay introduction, be purchased and germany communist guaranteed by the GSEs. In contrast, the non-prime market is regarded as being separate from the prime market, as subprime brokers usually focus on subprime loans only (Danis & Pennington-Cross, 2005, p. 6). Most mortgage lenders in the US are specialized mortgage brokers who do not retain the mortgages they originate on their own balance sheet and, consequently, bear very little credit risk in heroes case of mortgage defaults. Nevertheless, this makes them dependent on advantages and disadvantages of biological, access to the market for securitized products because they do not have sufficient equity to fund mortgages themselves for a longer period (Alexander, Grimshaw, McQueen, & Slad, 2002, p. 671). Mortgage brokers have an especially strong market position in essay introduction the subprime mortgage market where about 63 percent of all mortgages are originated through mortgage brokers (Kiff & Mills, 2007, p. 11). Germany? The subprime mortgage market is characterized as having a very high concentration of subprime mortgage originators. Table 1: The top US subprime mortgage originators in 2006. illustration not visible in this excerpt. From Ashcraft and Schuermann (2007, p. 9) In 2006, the top 10 subprime mortgage originators accounted for 60.3 percent of the total subprime mortgage market and essay the top 25 even made up 90.5 percent of the market. Looking at the top 10 mortgages originators, seven of them are specialized mortgage brokers and was east germany communist only three are normal commercial banks (Table 1). As mortgage brokers do not take deposits, they are not subject to the strict regulations that apply to heroes introduction, deposit-taking banks. Instead, they are only loosely regulated in accordance with the Home Owners’ Equity Protection Act and the Community Reinvestment Act (Schumer & Maloney, 2007, pp. 17-18). The most important characteristic of the importance of philosophy of education business model of mortgage brokers is the heroes essay introduction use of securitization to dispose the credit risk. In this business model, mortgage brokers deal with the application of the borrower and are responsible for pest the borrower’s credit check and the documentation and underwriting of the mortgages (Ashcraft, McAndrews, & Skeie, 2007, p. Heroes Essay Introduction? 10). They have a strong incentive to originate as many mortgages as possible without having the need to accurately check the quality of the conquistador the aztecs. borrower because they are paid on introduction, a fee basis that is linked to the number and value of the mortgages (Kiff & Mills, 2007, p. 11). Education Countries? This fee-based remuneration can even lead to predatory practices when brokers sell mortgages with unnecessary or harmful characteristics such as high prepayment penalties or higher interest rates than necessary with regards to the borrower’s default risk (Renuart, 2004, p. 480). The commercial banks who were exclusively involved in offering mortgages before mortgage brokers were established do more in-depth checks of the credit risk of the borrowers because they either take the total credit risk on their own balance sheet or they transfer the risk to GSEs who have strict requirements regarding documentation and the credit score of the borrower. As a result of the essay increased market share of mortgage brokers, the mortgage’s default risk that used to be held by and disadvantages of biological pest mortgage banks and normal commercial banks has been dispersed away from their balance sheets to the international capital markets. 2.4 Financial Instruments Underlying the Subprime-Crisis. One key aspect for understanding the current subprime-crisis is the transformation from subprime mortgages into essay new securities through the process of Career Goals Essay, securitization. Essay? In general, securitization means that certain homogeneous assets that produce cash flows such as mortgages or bank loans are combined and put into a pool that serves as collateral for a new marketable security called asset-backed security (ABS). The debt service of the ABS is directly derived from the cash flows of the underlying assets (Graff, 2006, pp. 241-242). Consequently, the credit risk of the ABS only depends on the credit risk of the underlying assets and is, therefore, independent of the credit risk of the original owner of the assets (Breidenbach, 2005, pp. 35-41). The most common form of ABSs is MBSs, which can be backed by in african both residential mortgages and commercial mortgages (Fabozzi & Ramey, 2000, pp. 564-565). The quality of MBSs can be increased through various measures to protect tranches with a high rating from essay, losses of the underlying collateral. The most common measures are structural features of the MBS: subordination, overcollateralization, and excess spread (Kiff & Mills, 2007, p. Spanish Conquistador? 5). MBSs that are structured using subordination are divided into essay tranches which represent different classes of bonds ranging from senior tranches to junior tranches. These tranches can be distinguished by spanish the aztecs. their credit risk and essay their return characteristics. Defaults of the underlying mortgages are applied to the junior tranches first and conquistador do not have an impact on the principal of the senior tranches until the principal of the junior tranches is completely exhausted. As a result, the junior tranches are characterized by high risk that is compensated by heroes essay introduction a higher yield in germany comparison to the senior tranches, which are very secure and, consequently, have a very high rating (Kiff & Mills, 2007, p. 5). The subordination feature that leads to different debt tranches is the introduction reason why the senior tranches can be rated investment grade even though the underlying collateral consists of risky subprime loans (Buiter, 2007, p. 2). The general MBS consists of was east germany communist, approximately 80% AAA-rated “Class A” tranches and 20% “Class M” mezzanine tranches that usually comprise 10% AA tranches, 5% A tranches and a 5% tranche with a rating of BBB+ and below. In addition, there is a small non-rated equity tranche that impairs the first losses of the heroes introduction underlying mortgages (Kiff & Mills, 2007, p. 5). This equity tranche is usually created through overcollateralization in a subprime MBS (Ashcraft & Schuermann, 2007, p. 34). This Conquistador Conquered The Aztecs.? An example of a typical subprime MBS structure is presented in Figure 2. Figure 2: Example of heroes, a typical subprime MBS. illustration not visible in this excerpt. From Ashcraft & Schuermann (2007, p. 35) Numerous investors, including pension funds, mutual funds, banks, and insurance companies invest in the “Class A” tranche because this tranche combines a high AAA rating of Education Countries Essay, government bonds with a relatively high yield compared to a government bond with the same rating. These investors usually only invest in this super senior tranche and not in the mezzanine tranche. The major reasons for international investors to invest in securities which are based on US subprime mortgages are the diversification of their asset portfolio and the generation of higher returns these products offer in heroes essay comparison to other investment products with an Education In Developing, equivalent credit rating. Especially securitized products offer a wide range of possibilities to diversify the portfolio with regard to asset classes, regional aspects and risk-return-profiles (Altunbas, Gambacorta, & Marqués, 2007, p. Heroes? 12). As a result, the “Class M” tranche is usually resecuritized into collateralized debt obligations (CDOs). The non-rated below mezzanine tranche is either kept by diabetes in african the MBS originator or sold to heroes, specialized hedge funds or proprietary trading desks of investment banks (Kiff & Mills, 2007, p. 5). Another typically used possibility to enhance the credit risk of a MBS is overcollateralization, which can be achieved by structuring the MBS with a higher principal balance of the underlying mortgages in comparison to of education, the par value of the MBS. Consequently, the first mortgage defaults are absorbed by heroes essay introduction the value of the overcollateralization before the importance of philosophy of education MBS is introduction impaired (Kiff & Mills, 2007, p. 5). The last common structural credit enhancement feature is excess spread, which means that the Development and Setting Essay weighted average coupon from the mortgage loans is higher than the coupon payments to MBS investors plus all other fees paid by heroes essay introduction the MBS. In other words, excess spread is a specific part of the interest payments of the mortgage borrowers that is specifically excluded from serving the collateral and that is used to increase the overcollateralization of the MBS (Kiff & Mills, 2007, p. 5). In 2006, average excess spread for subprime MBS was estimated to Education In Developing Countries, be 2.5 percent (Ashcraft & Schuermann, 2007, p. 36). Besides these structural measures to enhance the quality of MBSs, external mechanisms including credit insurance can also be used. Specialized credit insurance companies which are also known as monoliners such as Municipal Bond Insurance Corporation (MBIA) and Ambac Assurance Corporation (AMBAC), offer protection for heroes essay the senior tranche of MBSs and CDOs. They guarantee a timely payment of interest and the repayment of the principal. The Aztecs.? As a consequence, rating agencies rate the senior tranche AAA (Gangwani, 1998, p. 35). As mentioned above, one important investor in the MBS market are CDOs which are almost the only investor in heroes essay introduction the mezzanine tranches but that also invest in high-grade “Class A” tranches. Residential MBSs are estimated to account for 40 percent of total CDO collateral (Mason & Rosner, 2007, p. 27) whereas this figure is estimated to have increased in the last years (Fitch Ratings, 2006, p. 1). Subprime MBS mezzanine tranches even made up about 70 percent of the total collateral in mezzanine structured finance CDOs in 2006 (Krinsman, 2007, p. 14). Advantages Pest Control? CDOs are investment vehicles that invest in a pool of assets such as bank loans or MBS. Similar to ABSs, CDOs also fund their investments by issuing different classes of securities and its returns are linked to the returns of the underlying assets (Schorin & Weinreich, 2000, p. 241). But unlike ABSs, most CDOs are actively-managed by specialized investment managers who invest its funds according to predefined covenants that clearly state the average ratings of the invested securities and the share of securities with a certain credit rating (Ashcraft & Schuermann, 2007, p. 15). Heroes Essay Introduction? As a result, these CDOs can be forced to Career Goals, sell certain MBS tranches when these tranches are downgraded by credit agencies. Although the mezzanine MBS tranches only heroes essay introduction, make up 10 percent of the total MBS value, Mason and Rosner (2007, pp. The Aztecs.? 27-28) argue that CDO investments in introduction “Class M” tranches are critical for the entire MBS market because all “Class A” tranches cannot be sold without the mezzanine tranches being sold as well. Therefore, they conclude that CDO demand for MBSs has a leveraged effect on american, the possibilities for mortgage securitization and, consequently, this leveraged effect transfers over to the availability of residential mortgages. As a result, a decrease in investor demand for mezzanine subprime CDOs can have a huge impact on the subprime mortgage market itself. In addition, this effect is increased by similar characteristics of the CDO market itself, where the mezzanine tranches are mostly sold to so-called CDO2s. This refers to CDOs who themselves invest in other CDOs (Watterson, 2005, p. 6). Another financial instrument that became evident during the essay subprime crisis was asset-backed commercial papers (ABCPs) which are often used in connection with off-balance sheet conduits. ABCPs have a maturity of up to nine months and Development and Setting used to be issued to securitize commercial trade receivables (Herrmann, 2005, p. 46). In the last years, banks started to set up arbitrage ABCP conduits that have a similar investment strategy as CDOs as they also invest in essay assets with a long maturity such as CDOs or MBSs. Was East? But unlike CDOs which are refinanced by long-term debt, these conduits are refinanced by short-term ABCP. Consequently, these ABCPs need to be continuously rolled over to ensure the funding of the assets. In order to continuously guarantee the funding of the conduits, the issuing bank has to heroes, provide liquidity backstops to the conduits (Fender & Hördahl, 2007, p. 7). These liquidity backstops were used by was east communist the conduits to repay its commercial paper holders at essay, the end of the paper’s maturity when the conduit is Career Development and Setting Essay not able to issue new ABCP to roll over the funding (Barr, 2007, para. 26). Moreover, ABCP conduits are used by financial institutions, especially mortgage brokers, to finance the accumulation of originated mortgages until they are securitized to MBS (Stone & Zissu, 2005, p. 154). Introduction? The global ABCP market was estimated to have a size of $1.5 trillion at end-March 2007, of which $300 billion were regarded to be backed by mortgage-related assets (Fender & Hördahl, 2007, p. 7). Similar to an ABCP conduit, a structured investment vehicle (SIV) uses medium-term notes in addition to ABCPs as a funding tool (Fender & Hördahl, 2007, p. 8). 2.5 Consequences of the Fragmented Securitization Process. All participants in the value chain of subprime MBSs have limited incentives to be risk-avers, largely due to the fee-based remuneration that all of them receive. The historically strong relationship between mortgage lenders and mortgage borrowers is Development Goals now fragmented between numerous parties along the mortgage lending value chain of which each of them have individual interest to maximize their profit (Krinsman, 2007, p. 14). Heroes? Both subprime mortgage brokers as well as the investment banks that structure MBSs and CDOs receive major parts of their remuneration based on the volume of their products which leads to a focus on generating volume with a large number of deals instead of generating fewer high quality securities. This volume-based remuneration in combination with the dispersion of the credit risk through the securitization to a large number of investors reduces incentives to monitor quality in each part of the in african american process (Kiff & Mills, 2007, p. 7). Rating agencies play a key role in the market of introduction, securitized products as they assign credit ratings to MBSs and CDOs based on was east, a cash flow simulation that takes into heroes introduction account the probability of default of the Education In Developing Essay underlying mortgages and heroes essay the measures of credit enhancement of the structured product. This Spanish Conquistador Conquered? As described above, MBSs consist of thousands of individual mortgages and essay introduction CDOs invest in numerous MBSs and, consequently, consist of communist, even more individual mortgages, sometimes hundreds of thousands of mortgages. An MBS or CDO investor is therefore not able to establish his opinion about the quality of these products by himself in heroes introduction light of the complexity of the product and the underlying intransparency (Ashcraft & Schuermann, 2007, pp. Pest? 41-45). Instead, he has to use credit ratings as basis for his investment decisions. Consequently, these ratings are imperative for originating these products because they provide investors with an independent and objective view about the credit risk. Nevertheless, credit agencies are also remunerated on a fee basis and, therefore, are keen to continuously advise and rate new securitized products (Kiff & Mills, 2007, pp. 11-12). 3 The Development of the Subprime-Crisis. 3.1 Situation of the US Housing Market up to 2007. The strong momentum of the US housing market observed in the first half of this decade significantly changed in the last year. Beginning in late 2005, new house developments and house sales decreased. Building permits for heroes single family houses declined by 52 percent from September 2005 to October 2007 (DiMartino & Duca, 2007, p. 1). Moreover, sales of new single family houses consciously declined from the Education end of introduction, 2005 to the end of 2007 (Figure 3). Master's Thesis,  136 Pages. Research Paper (undergraduate),  17 Pages. Research Paper (postgraduate),  14 Pages. Doctoral Thesis / Dissertation,  94 Pages. Bachelor Thesis,  34 Pages. Master's Thesis,  104 Pages. Master's Thesis,  244 Pages. Scientific Essay,  14 Pages. Scientific Essay,  14 Pages. Diploma Thesis,  160 Pages. Project Report,  13 Pages. Term Paper (Advanced seminar),  27 Pages. Pre-University Paper,  19 Pages. upload your texts now! - Publication as eBook and importance of philosophy of education book - High royalties for the sales - Completely free - with ISBN - It only takes five minutes! - Every paper finds readers. Master's Thesis,  136 Pages. Research Paper (undergraduate),  17 Pages. Research Paper (postgraduate),  14 Pages. Doctoral Thesis / Dissertation,  94 Pages. Bachelor Thesis,  34 Pages. Master's Thesis,  104 Pages. Master's Thesis,  244 Pages. Scientific Essay,  14 Pages. Scientific Essay,  14 Pages. Diploma Thesis,  160 Pages. Project Report,  13 Pages. Term Paper (Advanced seminar),  27 Pages. Pre-University Paper,  19 Pages. GRIN Publishing, located in Munich, Germany, has specialized since its foundation in heroes 1998 in the publication of academic ebooks and books. The publishing website offer students, graduates and university professors the ideal platform for the presentation of scientific papers, such as research projects, theses, dissertations, and academic essays to a wide audience. Free Publication of and disadvantages of biological pest control, your term paper, essay, interpretation, bachelor's thesis, master's thesis, dissertation or textbook - upload now!

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An APA , American Psychological Association, style is heroes introduction, a standard of writing academic papers in a variety of subjects relevant to the social sciences. This allows to write essays and research papers according to importance of philosophy of education the same generally accepted standard in Sociology, Psychology, Education, Political Science, Business and other disciplines. APA Style is notable for essay introduction, certain requirements related to paper format, font, margins and headings, as well as referencing. We designed this page to guide you through all the peculiarities of formatting a paper in APA style . Learning about APA style will be a very rewarding experience for you, as you will be able to reply it in all of your next writing assignments. Quick Navigation through the APA Essay Format Page: The Fundamentals of an APA Essay Format. What comprises the of biological pest control APA style ? Does it provide requirements only to referencing the sources or to whole essay? In their published guide book, the heroes introduction American Psychological Association, provides APA standards on the following issues: Title page. Unlike MLA style which doesn’t require a title page, it is a must in APA essay format . This Conquered. It usually contains such standard elements as the title of the paper, the student’s name, teachers or course name, and the due date. The APA title page can be easily distinguished by the running header, the heroes introduction page number on the title page and two titles (a short one is followed by the full title). Abstract . Abstract is a single paragraph usually a half page long, and is written on In Developing Essay a separate sheet. Heroes Essay Introduction. An abstract summarizing the entire paper has the same copyrights as the whole paper. Advantages And Disadvantages Of Biological Control. It should provide the main ideas/results of the paper and mention the methodology used to achieve them. Page format . Page format recommendations in APA style concern page numbers, margins, indentation and spacing. In-text references . The format of heroes essay introduction references in APA format is the foremost subject of student’s concerns. You may pick up citations, quotations and summaries from various sources to support your statements. Essay. When you use the idea or results that are not yours, they are to be referenced correctly. Heroes Introduction. APA style approves of in-text references. The author and this spanish the aztecs., the year of publication should be included within the parenthesis in the essay. Introduction. Page numbers also need to be mentioned when picking up lines from a book. Use of quotations . APA style recommends to put short quotations in quotation marks. If the advantages of biological quotations used exceed the word limit of 40 words, then the writer should indent 5 spaces from the margin and it should be double spaced. Also, in case of a long quotation, quotation marks should not be used, instead it should be ended with a full stop. Headings . Essay. Though it may be not required for an essay, but if you will write a research paper or thesis in APA format you’ll need to structure it. Germany Communist. Headings are used to separate and classify paper sections. Thus use different heading styles for heroes, headings of sections and this conquistador the aztecs., subsequent subsections. Reference list . Reference list is a must when you use in-text references, for you need to present the full information about the sources used.The reference list includes all sources used in the essay writing and cited in heroes essay introduction, the paper, and it is arranged according to the alphabetical order by advantages control, author. It is also of great importance to know how exactly different sources are cited as books, journals, magazines, and web pages are cited in introduction, a different way with certain requirements to each type of a source. You may consider how the Education In Developing Countries basic APA requirements are met in APA Essay sample . APA Essay Template (Cick the essay introduction Image to Enlarge) When using APA style there are a few standards to of philosophy of education keep in essay, mind: double spaced; have all the margins set to one inch; it’s recommended to use the font serif typeface for the text and sans serif typeface for any labels; use 10-12 for the font size; always have page numbers; a header with the title of the Career and Setting Essay paper should also be used. So, you may either format your essay in APA format yourself or download APA Template in heroes essay, rtf file from P rof E . 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Your privacy is important to P rof E , none of your personal information or details, such as credit card or banking details, will ever be compromised or disclosed to any third party. You are always on the save side with P rof E ! Click here to place your order. References are obligatory in a body of the this conquistador the aztecs. essay if you use some external sources, and especially when you cite them in the APA essay . Introduction. In-text references are used instead of footnotes in APA format. The sources are indicated by the last name of an author, a year of publication and a page number (if possible). In-text references are put in parenthesis (round brackets) within the sentence. Thus the standard in-text reference in APA style will have the following format (Author, year) or (Author, year, page) . But there may be variations: 1. If you are referring to an idea from this conquered the aztecs., another work, summarize it findings, or tell about the authors viewpoint – you are referring to the whole book and should use (Author, year) format. Example : T. E. Lawrence, a British intelligence officer, became regarded as the man who was in heroes introduction, charge of the Arab revolt (Thomas, 1924). 2. If you are quoting the source or bring in of biological, figures provided in it, you need to include the page number in your in-text reference. Like: (Author, year, page). Example : Lawrence was compared to “a caliph who had stepped out from the pages of ‘The Arabian nights'” (Thomas, 1924, 16) 3. Introduction. If the author or the year of spanish conquistador publication is already mentioned in the sentence there is no need to repeat this information in the in-text citation again. Examples: With Lawrence in Arabia was published in 1924 (Thomas). Lawrence of Arabia became famous due to the book of Lowell Thomas (1924). 4. Multiple authors reference . If the essay source is written by multiple authors, then you should state last names of all of them, at Education least in heroes introduction, the first reference within the essay. Later in diabetes in african american, the essay, one can use the essay name of the first author with et al for others. Example: (Morris, Raskin, 1993) – first in-text reference. (Morris et al., 1993) – subsequent in-text reference. 5. In case of no author . In some cases the author may be an organization or department, so the stating of and disadvantages pest their name will complete the APA essay format . Or else the mention of the book will also fulfill the heroes essay introduction need. Titles of Education In Developing Countries books in the in-text references should be italicized, titles of heroes essay articles, chapters, and web pages are in quotation marks. Organization: (, 2009) Book: (The correspondence, 1914) The reference list includes all sources used in american, the course of the essay and cited in the paper. Essay Introduction. The references should always be organized in alphabetical order . This gives an organized look to the essay. It is also important to know exactly how different sources, such as books, journals, magazines, and web pages should be shown in the reference list. As certain requirements differ for each type of source: Book : Author, A. (Year of and disadvantages control publication). Title of work: SUBTITLE. Essay Introduction. Location: Publisher. Note: if you have several books by the same author in the reference list, you should list them in chronological order. Article : Author, A. In Developing. (Year). Title of article. Title of Periodical, volume number (issue number), pages. on-line source : Author, A. A. (Year, Month Date – if availiable). Title of article. Name of the web-site. Retrieved from heroes essay introduction, http://www.url/ on Year, Month Date. Readers and writers alike can find headings as a useful tool in writing. Aside from providing order, essay headings can function as an importance of philosophy of education ID – in the sense that it can provide identification on the ideas that are presented below. Headings function as a guide for your readers, as it will clue them in on heroes your thought flow. The APA style allows five levels of and disadvantages pest headings when writing. Level one is the introduction first category, while the subsequent levels are provisions for succeeding sub-categories. In the APA essay format it is of the utmost importance to use the titles and headings appropriately. 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The name of the course, the name of professor, and the date of submission are printed at the bottom of the APA title page. APA regulations on advantages of biological control abbreviations, tables and figures. You may not need it in heroes introduction, your APA essay , but there are APA regulations on abbreviations, tables and figures. Abbreviations can be used later in the essay after the full form is mention in the first time. This saves space, but makes a mention of the author, book or organization each time it is used. In APA papers both tables and figures should be presented on separate pages, with the caption at the bottom of the page. What to remember with the germany communist APA essay writing format. The main thrust of documenting guidelines is to introduction avoid plagiarism. To do so, several citing outlines have been created by many academics or groups – one of which is the American Psychological Association or the APA. 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