Assignment 3 - revising decision making process

Assignment 3 - revising decision making process - Jennifer...

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Jennifer DePuy Eng 110: Assignment 4 The Decision Making Process: Improving the economy 1. Recognize the problem The economy collapsed when the precarious position of the financial system was brought to light with the burst of the housing bubble. There were increasing numbers of subprime mortgages being issued. Borrowers were labeled subprime if they had low credit scores or had other cause to be labeled as a risky borrower. Credit was readily available with low interest rates and foreign funding in real estate markets. With the housing boom in 2005-2006, people were agreeing to mortgages with the hope that the value of the house would increase to help pay for the house or agreed to adjustable rates with the intention of refinancing once interest rates declined. However, the price of real estate decreased while interest rates increased, and many people found themselves filing for bankruptcy or foreclosing their homes. During the boom, derivates were packaged by banks and distributed to interested buyers. Many investors saw this as an opportunity to get a piece of the pie, and large insurance firms, like AIG, and other financial institutions bought significant packages of derivates with the hope of turning a profit. When the value of real estate fell, these institutions who had invested so much capital into subprime mortgages lost a substantial amount of money. Many mortgages were worth more than the price of the house, which forced the banks to try to relieve the burden and led to an increase in foreclosures. Banks were assuming too much risk and did not have the funds to handle the number of loan defaults. When these institutions were unable to lend money, the economy fell apart, the stock market plummeted, and the economic crisis began. 2. Define a goal or objective The goal is return normalcy to the economy by reestablishing good financial decision making in all sectors. Individuals need to be realistic with what they can afford
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to spend on their mortgage every month and maintain responsible borrowing practices. Adjustable rate mortgages are dangerous since interest rates can change unpredictably over their lifetime. The banking system needs to exercise more hesitancy with granting large mortgages to high risk borrowers. New regulation should be put in place to discourage financial institutions from trading derivates if they cannot handle the financial burden should they lose. 3.
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This note was uploaded on 03/28/2011 for the course ENGR 110 taught by Professor . during the Winter '10 term at UCLA.

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Assignment 3 - revising decision making process - Jennifer...

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