US Subprime Mortgage Market (A): Financial Innovation andWelfare Effects


Code : ECC0028

Year :

Industry : Banking, Insurance and Financial Services

Region : US

Teaching Note: Available

Structured Assignment : Available

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Abstract:In 2007, the sharp rise in foreclosures in US' subprime mortgage market segment snowballed into a global financial crisis. Such a remarkable event is tracked in a set of three case studies. This set sensitises students to the elements of the subprime crisis.The first in the set, this case study is meant to introduce students to various facets of real estate securitisation from a debt perspective. It primarily emphasises the unique aspects of US subprime mortgage market, a key segment in the fixed income universe. Debt instruments explored include Adjustable Rate Mortgages (ARMs), residential Mortgage Backed Securities (MBS) and Collateralised Debt Obligations (CDOs). Spotlight is actually on how financial engineering works for corporate, as well as, social benefit.

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Pedagogical Objectives:

The case makes students explore:

  • Why subprime mortgage market evolved?
  • Default risk and risk-based pricing
  • Various debt instruments - both in the primary and the secondary subprime mortgage market
  • Players and structure of the US subprime mortgage industry
  • Benefits and issues surrounding the subprime mortgage market.

    Keywords : US Subprime Mortgage Market, Financial Innovation, Default Risk, Debt Instrument, Finance Case Study, Mortgage Backed Securities (MBS), Collateralised Debt Obligations (CDOs), Financial Crisis, Adjustable Rate Mortgages (ARMs), Mortgage Industry

    Contents :
    US Residential Mortgage Market
    Subprime Mortgage Industry Structure
    Characteristics of Subprime Mortgage
    The Challenges and Welfare Effects

    Case Introduction >>

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