Www Fixedmortgagehouseloan R R Fixed Mortgage House Loan Fixed Mortgage House Loan Fixed Mortgage House Loan Szh Javascript:doTranslate('zh CN%7Cfr') Fixed Mortgage House Loan Gang Yi: U.S. Subprime Mortgage Crisis----Origins, Transition and Implications_Presentation Briefs_Academics_China Center for Economic Research (CCER)

U.S. Subprime Mortgage Crisis

----Origins, Transition and Implications

Gang YI

Assistant Governor, People's Bank of China

The emergence of subprime mortgage can be attributed to low interest rate. For the period from 2003 to 2006 when interest rate was record low, the origination of subprime mortgage reached the peak. The relationship between them is quite clear in logic despite somewhat lagging effect. When interest rate began to rise and housing price turned to fall, so came subprime mortgage crisis.

What triggered the crisis is the downgrading of related derivatives. The complexity of these derivatives makes investors dependent on the work of grading companies, while these companies work out their grading on the basis of quantitative models. Once the changes of interest rate or housing price undermine the assumptions of original models, grading companies may adjust grading dramatically.

Victims of the crisis include U.S. mortgage companies, investors and those who rely on financing with asset-backed commercial papers. China's banks have very limited investment in U.S. subprime mortgage-related products and are prudent in investment strategies. As a result, the direct loss caused by the crisis to China's banks is negligible.

The broad economy is being affected by the crisis primarily through the channel of housing price. Declining housing price make it more difficult for subprime mortgage borrowers to sell their houses and repay their loans. When banks take over the borrowers' houses and sell them coercively, housing price will be pushed downward further. This is a vicious circle.

As a response to the crisis, central banks have taken measures such as the injection of liquidity. It must be highlighted that the injection of liquidity is usually overnight, collateral-required and with interest payments in order to avoid moral hazard.