Paper on "The Impact of Financial Crisis on China"

Enlightenment of American subprime mortgage crisis to China

This paper introduces the reasons for the rapid development of American subprime mortgage, and analyzes the reasons for the whole subprime mortgage crisis from two aspects of macro-economy and subprime mortgage market. By analyzing the crisis in the United States, this paper sums up some indirect experiences and puts forward some views on the real estate market in China. ?

Keywords: subprime mortgage, USA; Reason; arouse

On March 3, 2007, 13, American New Century Finance Company was suspended by NYSE because it was on the verge of bankruptcy. It is the second largest subprime mortgage enterprise in the United States. On the same day, the new york stock market suffered the second "Black Tuesday" this year. The Dow Jones average price index of 3 0 industrial stocks plummeted by 242.66 points, and global stock markets also fell. The crisis of American subprime mortgage market broke out in an all-round way. ?

1 The definition of subprime mortgage and the main reasons for its rapid development?

There are various personal housing mortgage products in the United States, which can be divided into three types according to the credit quality of borrowers: high-quality mortgage, Alt-A mortgage and subprime mortgage. FICO in the United States distinguishes customer quality according to three indicators: (1) customer's credit history; (2) the borrower's debt-to-value ratio DTI(3) the loan-to-value ratio LTV of the mortgage loan applied by the borrower. According to the credit quality of customers, personal credit rating is divided into five grades: excellent (750 -850 points); Good (660 -749 points); General (620 -659 points); Poor (350 -6 19); Not sure (below 350 points). Personal credit is above 660 points, indicating that the borrower's income is reliable and the debt burden is reasonable, and the loan it applies for is generally classified as a high-quality mortgage loan; Loans applied by people whose personal credit rating is average (659-620) and who meet all the conditions for applying for high-quality mortgage loans but are unwilling to provide a full set of income documents are classified as subprime mortgages; Loans applied by borrowers with personal credit below 620 points, DTI over 55% and LTV over 85% are classified as mortgage loans. Most of these lenders are low-income people, and nearly half of them have no proof of fixed income and cannot provide legal certificates such as deposits and assets. ?

The American subprime mortgage market has developed very rapidly in recent years (for example, Figure 1). In 2006, the US subprime mortgage loan was about 600 billion US dollars, which was four times higher than that of 200 1 year. The rapid development of subprime mortgage market is closely related to its macro-economic development background. On the policy level, in 2000, a large number of high-tech enterprises engaged in the Internet in the United States went bankrupt due to the bursting of the Internet bubble. In order to avoid the risk of the US economy falling into recession, the newly appointed US President George W. Bush initially took measures to reduce taxes for the rich, but later found that the effect was not obvious. In order to expand employment and maintain economic growth, the Federal Reserve has taken the measure of reducing interest rates (6%- 1%). This expansionary monetary policy of the Federal Reserve has achieved great success, because American families borrowed more money to buy houses and spent in debt, which promoted the sustained prosperity of the real estate industry and greatly increased housing prices. The house price index (HPI) in the United States has risen from 168.4 in early 2006 to 1 in early 2006. ?

The strong rise in house prices has led to an increase in demand for subprime loans. This is because although the economic development momentum of the United States has improved during this period, people's disposable income has increased, but compared with the rising housing prices, the rising speed is not as fast as the rising housing prices (Figure 2). A large number of home buyers' housing mortgage loans do not meet the requirements of preferential loans and become subprime mortgages. Although the interest rate of subprime loans is higher than that of preferential loans, it cannot effectively curb the demand of borrowers. There are two main reasons: (1) the high interest paid by buyers can be offset by the appreciation of asset value brought about by rising house prices, and there will be a surplus; (2) Lenders engaged in mortgage loans have created complex sub-prime loan varieties, which makes lenders overestimate their repayment ability. For the supply of subprime loans, lenders are also willing to issue subprime loans for the following reasons: (1) The yield of subprime loans is about 2%-3% higher than other ordinary loans (6%-8% for ordinary mortgages); (2) Even if there is a large-scale default on loan repayment, due to the continuous prosperity of the American real estate market, American real estate financial institutions can say that the real estate as collateral will recover the principal and interest together by auction; (3) Real estate financial institutions can securitize it and transfer the risk to other investment institutions. ?

2. What is the operating mechanism and process of the US subprime mortgage market?

Asset securitization is the core link in the operation mechanism and process of subprime mortgage market. Asset securitization is to combine assets that lack liquidity but have future cash income flows. The structural reorganization of the cash flow generated by this combination should be based on the cash flow of issuing securities in the financial market to finance funds. The core of this process is to isolate and reorganize the risk and income elements in the loan to make it more effective in pricing and redistribution, thus benefiting all participants. The process of asset securitization can be represented by the following figure (Figure 3). From this diagram, we can see that there are many participants in the whole operation mechanism, and each participant has a different role in the market. The whole operation process will be introduced below. ?

Homeowners get in touch with real estate financial institutions (sponsors) through mortgage brokers, and then provide their own information to obtain corresponding loans according to their credit ratings. Sponsors package and sell their loans to SPE, a special purpose entity, to obtain funds, and lend the funds to homeowners. The asset pool obtained by SPE from the initiator is rated by the rating agency according to the different risks and benefits of each asset, and then the assets are issued as mortgage-backed securities, which are generally sold to institutional investors such as pension insurance, insurance companies and hedge funds. MBS are generally divided into two categories: the first category is issued by the government's National Mortgage Association (Ginnie Mae) and the Federal Mortgage Association (Fannie Mae). These bonds are restricted by the strict standards formulated by the government and have strict requirements on the borrower's credit rating and loan record; The second category is issued by private insurance, and the assets supporting such securities do not need to be strictly restricted by state guidelines. ?

Underwriters collect MBS after obtaining them, and then use the hierarchical structure method commonly used in internal credit enhancement mechanism to form mortgage creditor's rights, which are generally divided into three levels: senior, mezzanine and equity. Priority has priority over the other two categories in profit distribution, and the remaining profits are distributed downwards in turn. Once the default loss occurs, the equity level bears the loss first, and then expands to the intermediate level and priority level in turn. Priority is generally purchased by commercial banks, insurance companies, pension funds and mutual funds with low risk appetite; Hedge funds and other institutions prefer the middle level with higher risks and higher returns; The equity level is generally held by the sponsors. ?

In this process, there are three most important issues: (1) Securities issuance has certain assets, and its future income flow is predictable. (2) In other words, the asset owner must sell the asset to SPE. Establish a firewall between assets and issuers by establishing a risk isolation mechanism. Even if it goes bankrupt, it will not affect the assets that support the bonds, that is, it will achieve bankruptcy isolation. (3) A risk isolation mechanism must be established to isolate the asset from the assets of SPE, so as to avoid the threat of bankruptcy of SPE. The latter two aspects are the key to asset securitization. Its purpose is to reduce the risk of assets, improve the credit rating of asset-backed securities, reduce financing costs and effectively protect the interests of investors.

There are two main types of subprime loans issued by American loan financial institutions to people who borrow money to buy a house: fixed interest rate and adjustable interest rate. According to Fannie Mae's survey, in 2005-2006, 90% of adjustable-rate loans were adjusted interest rates, of which about 2/28 were mixed interest rates, that is, the first two years were fixed interest rates and relatively low, and the last 28 years were floating interest rates. During the floating interest rate period, when the interest rate rises, the pressure on the repayment will suddenly increase. Most subprime loans consist of interest loans and repayment of principal in installments. Interest-free loan means that the borrower only pays the loan interest in the first few years and does not repay the principal. Repayment of principal and amortization loan refers to the act of recording the balance difference of the next loan when the monthly payment in the current period is insufficient to repay the loan interest or lower than the monthly repayment amount accrued according to the change of market interest rate. When the accumulated outstanding interest exceeds the limit of original fund 15%-25%, the loan is converted into a loan with full monthly interest repayment, and the loan amount is recalculated every five years, which is an installment loan with paid principal. Due to the accumulated unpaid interest, the borrower will face a larger loan amount in five years. ?

What are the causes of the subprime mortgage crisis in the United States?

The rising interest rate punctured the real estate price bubble, and the falling house price was the direct cause of the subprime mortgage crisis. 2001-In 2004, Federal Reserve Chairman Alan Greenspan drastically lowered the interest rate (6%- 1%) in order to restore the American economy, which made the domestic use cost lower. However, due to the high international oil price during the Iraq war, the oil export in the Middle East earned huge oil dollars, and the American consumerism culture was deeply rooted in the hearts of the people. During this period, the export trade of emerging market countries to the United States was in full swing. At the same time, it has huge foreign exchange reserves, and the liquidity of the whole world dollar is rampant. During this period, the loose monetary policy of the United States also affected the monetary policies of other countries in the world. During this period, US President George W. Bush proposed the owner society and encouraged the American people to buy houses. Coupled with the hot speculation of external funds, American housing prices have been rising all the way. In 2004, the US government began to face greater inflationary pressure. From 2004 to 2006, the chairman of the Federal Reserve raised interest rates 17 times (1%-5.25%), which increased the pressure on borrowers to repay floating rate subprime loans rapidly. Originally, the credit rating of sub-prime loan applicants was low, and most of them were low-income, and finally they were unable to repay the loan. Due to the rising default rate, houses in the market can't be sold, house prices fall, the value of collateral drops rapidly, and the scale of dangerous loans continues to expand, which finally leads to this crisis. ?

The deeper reason of this crisis lies in the design defects of financial product subprime mortgage. In the above-mentioned mechanism to stimulate the operation of mortgage loans, real estate financial institutions package and sell their loans to SPE for risk isolation. In this way, the interests of the sponsors are directly proportional to the loan amount, which will lead to moral hazard and reduce the requirements for the borrower's credit qualification. In 2005-2006, some sponsors even launched a loan product that didn't require down payment, didn't check assets, and only needed to declare income. However, other regulatory authorities have not effectively supervised it. It is conceivable that the risks in the whole market will only accumulate. At the same time, most investors are too optimistic that house prices will continue to rise. Even if their disposable income is not enough to pay loans, they think that the rate of house prices will rise faster than the benchmark interest rate of banks. The repayment types designed by real estate financial institutions are short-term payment and long-term payment, which will inevitably promote the prosperity of the real estate market from the beginning. When the interest rate rises too fast, the borrower cannot repay the principal and interest, and the house price rises to a certain extent. Once the effective demand in the real estate market falls, the house price falls, and the borrower is insolvent. The emergence of default phenomenon means that the capital chain is broken from the source, and the risk will be transmitted in turn. With the increase of default rate, credit institutions will lower the credit rating of related MBS, the market value of MBS and CMO will drop sharply, and CMOs held and purchased by investment institutions will also be doomed. According to the needs of the situation, commercial banks will inevitably require hedge funds to repay loans in advance and increase the margin. At the same time, the basic people will also bring strong redemption pressure to hedge funds. In 2007, banks in developed countries injected about $700 billion into banks to increase market liquidity and mitigate the impact of the crisis. ?

4 Be prepared for danger in times of peace: Deeply understand the enlightenment of American subprime mortgage crisis to China?

In recent years, the development of China's real estate industry is quite similar to that of the United States. Due to the irresistible trend of economic globalization and financial integration, the United States maintained a low interest rate policy for several years before the outbreak of the subprime mortgage crisis, and China was no exception. Excess liquidity is obvious (asset prices skyrocket). China's macro-economy continues to develop strongly, the urbanization process is accelerated, and the demand for urban housing is strong. In addition, some foreign hot money flowed in due to the appreciation of RMB, speculating the domestic real estate industry, and house prices continued to rise sharply. Banks are involved in the real estate industry on a large scale, increasing the supply of funds to the real estate market, and there are also signs of relaxing the conditions of personal housing mortgage loans. With the introduction of the government's continuous control policy, the macro economy has entered the cycle of raising interest rates, and house prices in some cities have been stagnant or falling. Although there is no large-scale default in China at present, we should take precautions and learn from the American crisis. ?

The subprime mortgage crisis in the United States is the result of long-term accumulation of its financial institutions. On the one hand, the financial lending department did not strictly control risks, and on the other hand, American government agencies did not strictly supervise its real estate finance department. Let's analyze the experience it provides us:

From the perspective of banks, it is necessary to strengthen the management of their own risks. As of 2007, 965,438+0% of domestic buyers bought houses through loans, and banks should strictly examine the income and assets of lenders when issuing loans, and should not resist the temptation of interests, lower the requirements for borrowers, and prevent the occurrence of lowering down payment requirements or even zero down payment. The concept of banks should be changed, and mortgages should not always be regarded as high-quality assets. The real estate industry is a cyclical industry, and its value is constantly changing with the relationship between supply and demand in the market. During the market boom, the value of real estate will continue to rise, but once the market turns around, it is the banks themselves who will eventually suffer. Banks can stress test the risk of housing mortgage loan, quantify their potential gains and losses, and evaluate their risk status by applying comprehensive price changes to their asset portfolio. Banks can also transfer risks through asset securitization, which can not eliminate risks in essence, but can only transfer risks to other investors. In view of the important position of commercial immigrants in China's national economy, in order to avoid excessive concentration of mortgage risks in the banking system, the process of asset securitization can be accelerated, but we must learn from the lessons of the subprime mortgage crisis in the United States and choose better bank assets for securitization to avoid moral hazard. ?

Government departments should also strengthen the supervision of the real estate financial market from the outside and improve their ability to cope with the crisis. House price is an important factor affecting the quantity and scale of housing mortgage loans, and government departments should strengthen the monitoring of house prices. In view of the development of China's real estate industry, on the one hand, we should severely crack down on speculators in the domestic real estate industry, and we can curb their hoarding of housing and control real estate prices through taxation and other means; On the other hand, an effective mechanism should be established to strictly limit the inflow of foreign hot money and push domestic housing prices above the equilibrium price determined by real housing demand. Government departments can also establish some mechanisms to count and publish the real housing demand (through some reward and punishment means, such as tax relief for buyers) and supply quantity (including new construction and second-hand housing) in the real estate market in various periods, so as to make the information more transparent and play a guiding role in housing prices. Government supervision departments strengthen supervision over banks and other financial institutions engaged in housing credit, promote contract standardization, spot check loan quality, limit lending standards, and supervise financial institutions to fully disclose financial product information to borrowers, so that borrowers' right to know and choose can be effectively guaranteed. Standardize the mortgage market, prevent vicious competition among banks from grabbing customers and avoid the lessons of the United States. Risks in the financial market exist all the time. Once the financial crisis breaks out, government departments must take strong measures to alleviate the impact. The government should strengthen the risk education for investors and lenders, so that they can deeply understand the risks in the financial market ideologically. Once the crisis breaks out, we must first stabilize market confidence and prevent the crisis from spreading to more fields and deeper levels. Government departments should also learn to use the international financial market to share their own risks and strengthen cooperation with foreign government and non-government departments and institutions. ?

Reference materials?

〔 1〕? Du Houwen, Chu Chunli. American subprime mortgage crisis: origin, trend and influence [J]. Journal of China Renmin University, 2008, (1).

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