Chapter 14: Economic and Other Challenges Affecting the Canadian Financial Servies Sector

Question 1

Sub-prime mortgages and Asset-backed commercial paper can be traced to two significant human factors

Answer 1

Greed

Unreasonable expectations

Question 2

What is a sub-prime borrower?

Answer 2

these are people who did not pass the 5-C credit test

Question 3

Sub-prime borrowers are typically people who may have

KNOW 6

Answer 3

•	weak credit histories 
•	payment delinquencies  
•	been in bankruptcy 
•	reduced financial capacity (cash flow) 
•	little or no collateral 
•	poor credit scores 
•

Question 4

The unreasonable expectations impacts

Answer 4

• homeowners, who had seen the value of their homes almost double within eight years
• investors, who assumed that an investment that was backed by a mortgage was somehow a guarantee that they could not lose any money on their investment capital
• lenders, who believed the appetite for these investments to be never-ending and that the real estate market (both in terms of new construction and prices)could only up

Question 5

When the housing market was booming many lenders did not complete their due diligence to ensure that

Answer 5

• any lending they did was proper and appropriate to the financial position of their client
• all risks were fully identified and taken into account in their risk analysis
• the money of the lender’s depositors, owners, and investors was adequately protected

Question 6

What happened with the greed of mortgage lenders?

Answer 6

create more and more mortgages caused many of them to approved mortgages for borrowers who did not qualify for them

• 1/4 of the approved mortgages ended up being a Ninja or Liar Mortgage

Question 7

Meaning of N.I.N.J.A. and Liar

Answer 7

No Income No Job no Assets (NINJA)

Liar referred to the practice of the client (the borrower) actually being quite dishonest with respect to their financial position when they were providing information to their potential lender

Question 8

What is Asset-Backed Commercial Paper?

Answer 8

• is short-term debt (typically for periods of 60 to 180 days but no more than one year) issued by corporations
• is made up of a bundle of loans, such as mortgages, credit card receivables and vehicle loans
• debt is sold to investors

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Question 9

Trouble Asset Relief Program

Answer 9

the US Department of the Treasury created a fund worth of up to $ 700 million to purchase, or guarantee, “troubled assets” – mostly mortgages, from banks and other lenders

-from the program helped keep the weaker parts of the American banking system in business (“liquid” or “afloat”) long enough to recover from the recession