A slew of new sub-prime lenders has been entering the American sub-prime market, ratcheting up competition; since the late I990s, the profitability of this sector has taken a nosedive. The overheated competition has intensified the battle for customers, leading to an increase in the prepayment rate. In particular, accounting issues surfaced wherein some sub-prime lenders that had been using securitization to obtain financing, were embedded in the credit obligations of previously issued marketable security products.
In the process of securitization, he issuer should pay attention to the valuation of the most subrogated portion. When calculating the present value of it, sub-prime lenders should have been more conservative in their estimates of the default and prepayment rates than with debt securitization intended for the prime level. However, most sub-prime lenders were optimistic, believing that the current business environment would continue indefinitely. Meanwhile, those sub-prime lenders who limited their dependency on securitization continue to compete shoulder to shoulder with conventional financial institutions to this day. This point is the focus of attention not only in terms of accounting, but in terms of management strategy as well.
In the past 10 years of the United States financial market, the securitization scheme helped sub-prime lenders obtain financing, but also increased competition contributed to the demise of lenders without sufficient risk management capabilities.
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