Summary
Over the past half year there has been turbulence in money and credit markets as a result of liquidity problems and reduced risk willingness. Problems in the US residential mortgage market and associated bank losses triggered the turbulence. The scale of problems in the residential mortgage market is greatest for the sub-prime segment, but the default rate is also rising for the Alt-A segment and ordinary floating-rate mortgages. Uncertainty surrounding the potential losses on residential mortgages is amplified by securitization of the loans, which makes it difficult to identify the institutions that will suffer losses in case of default. Securitization involves the issuance of mortgage-backed bonds by a special purpose vehicle that is not subject to supervision and capital adequacy requirements. Falling house prices and rising defaults on US residential mortgages also triggered a decline in the market value of highly rated asset-backed securities. Banks that owned these securities encountered problems.
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Problems in the Us Residential Mortgage Market
Over the past half year there has been turbulence in money and credit markets as a result of liquidity problems and reduced risk willingness. Problems in the US residential mortgage market and associated bank losses triggered the turbulence. This box looks at the structure of the US residential mortgage market and the background for the problems.
The nominal value of mortgage loans in the US is estimated at about USD 10.2 trillion at end-2006. A...See the full content of this document
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