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1、FINAL RESEARCH PROJECTImpact of sub-prime loans on US housing and stock marketsByJohn H. Stumbo IINovember, 29 2008.Abstract:The new Presidential Administration has much work to do to stabilize the economy. The US housing and stock markets are in serious trouble. The US Government is struggling to f
2、ind a way out as millions of Americans struggle to put food on the table. This research paper has concluded that the US tax-payer that has received sub-prime lending has contributed significantly to the issue. The data supports the fact that financial institutions have ignored the risk associated wi
3、th sub-prime lending, and allow the passing of that risk to the US tax-payers. This allowed the prices of homes to increase along with the amount of risk that these institutions have been willing to undertake up to this point. The facts speak for themselves; fully 21 % of the sub-prime loans made in
4、 the US are in foreclosure. The American people really dont have anyone to blame but themselves for allowing this to happen. However, if you only listen to the media, the focus of the problem is only upon the financial institutions themselves and not the borrowers. If the American public made the de
5、cisions necessary to live within the means of the household, then we would not be in the financial trouble we currently find ourselves. Sub-prime lending should be outlawed, this will prevent this issue from ever happening again, and we must all learn to live within our means. It is key, to remember
6、 that the current state of the economy is not the fault of a single President or Administration; it is the accumulation of many years of poor lending habits of both the financial institutions and borrowers.Table of ContentsChapter 1: The research question and backgroundpage 2Introduction2Background3
7、Problem.4Purpose.6Significance of the study.7Summary.8Chapter 2: Review of existing literature9US stock market9US housing market11Chapter 3: The research design.12Research design12Research method.12Expected findings and implications.13Chapter 4: The research results.14Research results14Recommendatio
8、ns for future research.19References.2021Chapter 1IntroductionThe current state economy in the United States is soon to be in the hands of a new Presidential Administration. There is much that the new President and his Staff must do in order to continue to bring the changes needed into the economy. T
9、here are some that believe that the United States Stock Market Exchange is in dire straits and could topple down at any time. These fears for the economy are driven by the media and the new Administration must take care in order the keep the American Way of Life strong. The root cause, which has bee
10、n identified and agreed upon universally, is the “bad credit loan”; this is a result of sub-prime loans. There is no official definition of a sub-prime loan, but it is generally assumed to be a loan made to a borrower with a FICO credit rating below 660. A FICO score is a measure of credit risk deve
11、loped by Bill Fair and Earl Isaac in 1956. These “bad credit” loans apply to home mortgages, auto loans, and credit cards. Many want to place the blame for the current state of the economy on the sitting US President George W. Bush, its easy to place blame on the current leadership, but is it accura
12、te to place such blame? This means that the public wants to blame others for the economic situation; instead of examine how we got here in the first place; placing “wants” ahead of “needs” and receiving loans that could not be repaid. The inability to repay sub-prime loans has contributed significan
13、tly to the current state of the US economy. Background Recently, we have seen the bail out of the financial industry in the US. This bailout cost the American tax payer approximately $700 billion dollars. The bailout is focused to relieve the financial systems bad credit loans, and to start the bank
14、s lending again (Blodget, 2008). The majority of the “bad credit loans” are centered in the housing market, many homes in the US are now in a foreclosed state, and houses in the US are not valued as high as they had previously been appraised.The homes that are foreclosed and sit empty are a drain of
15、 the financial institution that owns the property. Foreclosures have accounted for more than $3.5 trillion in homeowner equity wiped out since the spring of 2006 and foreclosures reaching the highest level since the Great Depression (Wasik 2008). These properties mostly sit empty and cannot be sold
16、quickly to allow the bank to free up the funds associated with owning these properties. With so much outstanding debt, the banks stopped lending, not only to the public but also to each other. With the halt in lending, the US stock market tumbled, without the bail out who knows where the market woul
17、d have bottomed out. Without doubt something needed to be done to stabilize the market, but there are still challenges ahead as the market still teeters on the brink of the edge. Keeping the US stock market stable is globally important as the US stock market affects the other stock markets globally.
18、 Fluctuations in the US stock market cause far reach impacts into the other stock markets; having both positive and negative effects.ProblemThe US Treasury Departments bailout plan included many different monitoring systems and stipulations to ensure that the funds will be used correctly. However, w
19、ill these measures be enough to ensure that the American Tax-payer is not abused through the mistreatment of the funds available to these financial institutions, will there need to be additional measures in order to ensure proper usage of the available funds?These measures currently include:Equity s
20、takes: Federal assistance is to be accompanied by measures to ensure that tax-payers will receive any future gains in the market place. The bailout is not just a give-away of tax-payer monies to companies that cannot sustain normal operations due to poor business planning.This means that Federal pur
21、chases of mortgages or related assets are to be passed to tax-payers in the form of an equity stake, and should be proportional to the amount of aid any firm receives. Also an equity stake in all firms that benefit from aid from government assistance must be part of the plan. This is so both shareho
22、lders and tax-payers share both the cost, and any potential long-term benefit from the bail-out funding.Companies benefitting from the government aid that show an increase in future performance should pay back to the government, no matter if an asset class is doing better market wise than others. Th
23、is will keep companies from only releasing poorly performing assets as equity stakes with the government.Full disclosure is a requirement; all participating companies are subject to all regulatory and reporting mechanisms, including the reporting of all liabilities. Only normal accounting methods ar
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