FI351_CC

eliminated the last barriers between commercial and investment banks, allowiing commercial banks to enter areas of more risk

banks forced to make loans in bad neighborhoods

• guidelines rewrote prudent lending rules
• -lack of credit history is not a disqualification
• -welfare payments accepted as source of income
• -temporary unemployment benefits accepted as income
• -instructed to be flexible on employment criteria

• prime (A-Paper)
• Alt-A (alternative paper)
• Sub prime

• reflects borrowers who do not meet underwriting criteria and have a higher perceived risk of default normally as a result of credit history
• typrically pay 2% premium over prime - subprime differential

the process of turning an illiquid asset into a liquid saleable asset

one that can be exchanged for cash instantly at fair market value

• bypasses the traditional financial intermediaries to go direct to investors in the marketplace to raise funds
• two forms: mortage-backed securities (MBSs) and asset-backed securities (ABSs)

include second mortgages and home-equity loans based on mortgages, credit card receivables, auto loans

sold to market in categories representing the credit quality of the borrowers in the mortgages

• scenario analysis
• stress testing of portfolios
• 'what it' analysis

• a contract, a derivative, which derived its value from the credit quality and performance of any specified asset
• in short: bet whether a specific mortgage or security would fail to pay on time or at all
• designed to shift the risk of default to a third-party
• provide insurnace against the possibility of borrower not paying

the method of making ivnestment more attractive to prospective buyers by reducing their perceived risk