During the subprime mortgage crisis, the mortgage loans have transferred a large quantity of risks. Statistics showed that in 2006, 30% American could not pay their loans timely, and there are about 2.2 million people lost their houses. As one of the important financial tools in US market, the subprime mortgage loan securitization has exerted great influence on the market and US economy. In US, 80% of the mortgage loans are sold by securitization, and the investment banks again created CDO based on MBS. With the process of securitization, the risks taken by singular banks and single loans were transferred to other institutions and investors, and with the effect of financial leverage, the risks are amplified and separated from the basic assets, which caused the asset bubble.
During the process of securitization, how does risk on the innovations transferred, and how does the single default risk transferred to every corner of the market? These topics are studied in the article.
The article analyzed the risk transfer mechanism on US subprime mortgage loans securitization. Some conclusions are made generalized as follow:
(1) The direct reason for the crisis is the risks on subprime mortgage loans. The mortgage loans institutions have not done their duties of investigations on loans applicants. They believed that the default of payment could be retrieved by the growth of value on collateral. The practice has induced the bubble in the real estate market. The risks have continuously released to the economy. At last, when the housing prices fell down and the interest rates climbed up, the risks exposed. And the securitization has amplified the risks.
(2) There is amplification effect when the risks transferred during the securitization process. In the theoretical part, the article analyzed the amplification based on the investment banks; credit rating institutions and investors herd behaviors.
(3) The risks would transfer trough the channel from innovation of products, securitizing institutions and the market. The innovation products are based on the back-up assets, which caused the transfer of risks. The financial institutions transferred the risks through selling and buying and accumulated the risks. At last, risks transferred in the market.