2008 was one of the worst years in the history of world finance. The so-called great recession paved the way to lost jobs, massive debts, and closure of some businesses from the USA that spread all across the globe. When a financial crisis hits, individuals, even organizations and companies depend on credit. However, firms and banks would impose a strict regulation on giving out credit to people due to the tight situation in finance.
The collapse of Lehman Brothers
One of the first things that ignited the global financial crisis was the collapse of the Lehman Brothers.
It was then, one of America’s biggest firms in finance filed for bankruptcy protection following the immense departure of most of its clients, far-reaching losses in its assets and stock, and depreciation of its resources from credit rating agencies. Lehman Brother’s filing of bankruptcy is one of the biggest bankruptcy cases recorded in US history and sent shock waves in the financial markets arena.
Debt Securitization
Debt Securitization was also one of the major factors that caused the collapse of financial and economic crises all across the globe.
Debt Securitization became a practice in finance that involves pooling various types of debts including commercial mortgages, auto loans, residential mortgages and credit card debt obligations, then selling them to investors on the secondary market with margins priced in for profits.
The originator primarily has the assets involved in the deal and at the same time, this is normally a company that aims to restructure and adjusts its finance, capital, and debt.
An enormous amount of portfolio of assets is collected and pooled together and is then transferred to an SPV or special purpose vehicle. This is the issuer, a non-taxable trust or company created solely for the purpose of backing the assets.
Once the assets are shifted to the SPV, they cannot be returned to the originator and this is where problems arose.
There will be an issuance of tradable securities. To entice investors, some deals involve a guarantor which is a third-party. It acts like an insurance that provides protection to the portfolio, assets, the interest, and principal for a fee.
Mortgages in 2008
Toxic mortgages spread like an epidemic in 2008. Credit lines were completely over-used and the ratings that were assigned to mortgage securities were greatly overvalued.
With the economy and lose legislation booming in the prior years, it was easier than ever to apply for an FHA mortgage loan (or any other kind of loan, for that matter) and get approved with less than perfect credit.
Down payments weren’t even a consideration and there were several loan programs that would qualify the borrower with credit scores as low as 500 and that is where it became dangerous for everyone involved. Some of these people didn’t even have jobs!
This led to a vast increase in US home values as well as lightly regulated mortgage guidelines. Data from the US Bureau of the Census and Federal Reserve suggests that the over-regulated markets can be the source of the highly increasing mortgages.
What to Do – Tips
Things, like the Great Recession that happen in an instant and without proper preventive measures, can greatly affect you and your living.
Here are some helpful tips to prevent a financial collapse amidst economic crises:
- Assess the current market value of all your assets and properties. This also includes the current outstanding balance in your bank account.
- Have a list of all of your creditors. This way, you can have a record of who to contact in case of a financial emergency.
- Check the number of your current debts, mortgages and other payables.
- Always keep a part of your paycheck for savings (Have a least 6-months of salary save up for a rainy situation).
- Do not waste your money on unnecessary items… The less you spend, the larger amount of money you keep. It’s better to be prepared in times of emergency.
This article was written by WeAreSEOguru
