Financial innovation is the continued development of financial items that are designed to achieve specific client objectives. However, the so called “innovation” over the last few decades led to products that dramatically expanded leading to the present crisis. Some of the former products include the adjustable-rate mortgage, fixing of subprime mortgages into MBS (Mortgage-backed securities), Collateralized Debt Obligations (CDO) for investors trading, which was a kind of securitization and a type of credit insurance referred as Credit Default Swaps (CDS). The products varied in complexity and the way they could be valued in the records of financial institutions and more information click here.
Issuing of CDO grew from an approximation of $20 billion within Q1 2004 into its peak of more than $180 billion by Q1 2007 before declining back below $20 billion by Q1 2008. More so, the CDO’s credit quality went down from 2000 to 2007 as the amount of subprime among other non-prime mortgage debts grew from 5% to 36% in terms of CDO assets. As per the subprime lending, the CDS and its portfolio known as synthetic CDO allowed a theoretically infinite sum to be wagered into the finite aggregate of housing loans outstanding, given that sellers and buyers of the derivatives could be traced. For instance, purchasing a CDS with the aim of insuring CDO ended exposing to sellers with similar risks as if they possessed CDO, after the CDOs became worthless and read full article.
Despite the aftereffects of the financial crisis, Equities First is a great company that is turning the products of financial innovation for the benefits of potential borrowers. With most banks’ regulations making borrowing difficult, Equities First is working to deliver on its missions of providing affordable and easy loans using stock as collateral. The loans have non-recourse feature, thus in case of default, they are not followed by the lender. Also, the non-purpose feature ensures investors can use their loans according to their choices and Equities First of Linkedin.