Subprime Mortgage Crisis Flashcards
7 cards from real Mortgage practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Subprime Mortgage Crisis flashcards as text
What was the global spread of the subprime mortgage crisis primarily caused by?
Answer: International banks had purchased U.S. mortgage-backed securities, spreading losses worldwide
Banks in Europe, Asia, and elsewhere had bought U.S. MBS products, transmitting losses globally and turning a U.S. housing problem into the worst worldwide financial crisis since the Great Depression.
What role did excessive leverage play in magnifying subprime crisis losses at major financial institutions?
Answer: High debt-to-equity ratios meant small declines in asset values wiped out entire capital bases
Investment banks were leveraged 30-to-1 or more, meaning a 3% drop in asset values could eliminate all equity, triggering insolvency and panic selling that accelerated the crisis.
What is 'mark-to-market' accounting, and why did it become controversial during the subprime crisis?
Answer: Valuing assets at current market prices, which forced write-downs on illiquid MBS when markets froze
Mark-to-market required firms to value MBS at fire-sale prices in frozen markets, potentially exaggerating losses and triggering capital requirement violations, prompting debates about relaxing the rule.
What does 'moral hazard' mean in the context of the subprime crisis bailouts?
Answer: The risk that guaranteeing firms against losses encourages future reckless behavior
Critics argued that bailing out institutions like AIG and Citigroup rewarded risky behavior and sent the message that large banks would always be rescued, encouraging future excess.
What was the 'National Mortgage Settlement' of 2012?
Answer: A $25 billion agreement between 49 states and the five largest mortgage servicers over foreclosure abuses
The 2012 National Mortgage Settlement required Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial to provide $25 billion in homeowner relief over robo-signing and foreclosure fraud.
How did the Federal Reserve respond to the early stages of the financial crisis in 2007–2008?
Answer: It cut the federal funds rate aggressively and created emergency lending facilities for financial institutions
The Fed slashed the federal funds rate from 5.25% to near zero and created facilities like the Term Auction Facility and Primary Dealer Credit Facility to inject liquidity into frozen credit markets.
What is 'strategic default,' and why did it increase during the subprime crisis?
Answer: Deliberately stopping mortgage payments on an underwater home even when able to pay, because it is financially rational
When homes lost 30–50% of their value, some financially capable homeowners chose strategic default because continuing to pay exceeded the economic benefit of owning an asset worth far less than the debt.