Securitization And U.S. Sub-prime Mortgage Crisis

Securitization is the most dynamic financial innovation in the world, which has obtained widespread application in the developed market-directed economics. This paper introduces the elementary theory of securitization and its domestic and foreign development. Review the growth of U.S. sub-prime mortgage crisis and explain the sub-prime crisis with Minsky's financial instability hypothesis.This paper is composed of five chapters. Chapter one is an introduction, which introduces the background, objects of the paper. Chapter two gives a general over view of securitization theory, including the definition, classification, participants and business process of securitization. Chapter three analyzes the risk of securitization. Chapter four introduces its domestic and foreign development. Based on introduction of some basic concepts chapter five explain the cause of the sub-prime crisis by Minsky's financial instability hypothesis. The conclusions are as follows: The financial system according to Minsky is inherently unstable. Securitization may lead to increase of credit risk. But we couldn't say it that securitization lead to financial instability when the level of securitization credit risk is less than others. Sub-prime crises are not the result of irrational exuberance, but rather structural flaws that are inherent to financial system. It is the main cause of the sub-prime crisis that the income and debt are unequal. The sub-prime schemes with cheap money financing come as a temporary remedy for low-income groups seeking homeownership. Cheap financing disappear as interest rates rise, and home values fall. Finally, the most efficient way to attack the crisis at its roots is through a job guarantee program, which could help homeowners keep their homes and provide stability to real estate values, indirectly stabilizing the mortgage-backed securities markets and financial markets.