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Lecture Legal and regulatory aspects of banking supervision – Chapter 3

The following will be discussed in this chapter: Credit rating agencies, mortgage brokers, secondary mortgage markets, the mess, evolution of home mortgage, new model of mortgage lending, private sub prime mortgage process, reasons for forming of subprime mess. | MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Session: Three 1 Summary of Previous Session General principles of banking regulation Minimum Requirement Supervisory review Market Discipline Banking Crises Banking system (Operations, potential Problems, Criticality) Institutional investors investment banks Pension Funds Hedge funds Central Bank. US Example Government Securities / Bonds 2 Agenda of this session Credit rating agencies Mortgage Brokers Secondary Mortgage Markets The Mess Evolution of Home Mortgage New model of Mortgage lending Private sub prime mortgage process Reasons for forming of subprime mess 3 Credit Rating Agency (CRA) Company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves A credit rating for an issuer takes into consideration the issuers credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being | MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Session: Three 1 Summary of Previous Session General principles of banking regulation Minimum Requirement Supervisory review Market Discipline Banking Crises Banking system (Operations, potential Problems, Criticality) Institutional investors investment banks Pension Funds Hedge funds Central Bank. US Example Government Securities / Bonds 2 Agenda of this session Credit rating agencies Mortgage Brokers Secondary Mortgage Markets The Mess Evolution of Home Mortgage New model of Mortgage lending Private sub prime mortgage process Reasons for forming of subprime mess 3 Credit Rating Agency (CRA) Company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves A credit rating for an issuer takes into consideration the issuers credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued 4 4 Credit Rating Agency (Contd.) Ex: Moodys (U.S.), Standard & Poors (U.S.) Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments. For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk. 5 Mortgage Broker Mainly found in developed economies like US, Western Europe Professionals who are paid a fee to bring together lenders and borrowers Sells mortgage loans on behalf of businesses (ex. Banks) 6 6 Mortgage Broker (Contd.) Tasks undertaken: Marketing to attract clients Assessment of the borrowers circumstances (Mortgage fact find forms interview). This may include assessment of credit history (normally obtained via a credit report) and affordability (verified by income documentation) Assessing the market to find a mortgage product that fits the clients needs (Mortgage presentation/recommendations) 7 Mortgage Broker (Contd.) Applying .