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Assignment for next week. Each – pick a country Research what that country is doing to remedy problems raised by financial crisis. EXTRA CREDIT: prepare a synopsis of what you find. One page – bullet points!. OFFICE: Rm. 1047 [First Floor of this Building] Ofc . Hrs ?.

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Assignment for next week

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Assignment for next week

Assignment for next week

  • Each – pick a country

  • Research what that country is doing to remedy problems raised by financial crisis.

  • EXTRA CREDIT: prepare a synopsis of what you find. One page – bullet points!

OFFICE: Rm. 1047

[First Floor of this Building]

Ofc. Hrs?


Couple of misc concepts before moving on

Couple of misc. concepts before moving on…

  • Escrow:

  • HYPOTHETICAL:

    Seller owns an apartment bldg. – FMV = $3 mill.

    Lender #1: 1st mortgage with = $1 million (bal. due)

    Lender #2: 2nd mortgage = $400,000 (bal. due)

    Judgment recorded vs. X in amt. of $100 k

    Buyer - contracts to buy X’s bldg. for $3 million.


Escrow opens

Escrow opens

  • Lender #1: 1st mortgage with = $1 million (bal. due)

  • Lender #2: 2nd mortgage = $400,000 (bal. due)

  • Judgment recorded vs. X in amt. of $100 k

  • Buyer will borrow $2.3 million from Wells Fargo Bank.

  • What does Buyer ultimately want?

  • What does Wells Fargo want?

  • How will Wells Fargo gets what it wants?

  • What will happen to Lender #1 and #2?


Escrow instructions

ESCROW INSTRUCTIONS

  • Pgs. 54-55 of materials

  • Duty of escrow officer

  • Ultimate result:

    • Title Insurance Policy


The global financial crisis

The Global Financial Crisis

Impact on other countries


What did you learn from the assignment for today

What did you learn from the assignment for today?

  • This American Life: (2008) Giant Pool of Money–or- some other program?


Secondary mortgage market pg 49

Secondary mortgage market - pg. 49

  • What is it?

  • Why does it exist?

  • Mortgages sold by originators

  • Packaged into mortgage-backed securities

  • Sold to investors


Four major participants in secondary mtg market

Four major participants in Secondary Mtg. Market

  • Who are they?

  • Mortgage originator

  • Aggregator: large mortgage

    originators with ties to Wall Street

    firms and government-sponsored

    enterprises (GSEs), like Fannie Mae and Freddie Mac.

  • Securities dealer: Most Wall Street brokerage firms have MBS trading desks.

  • Investor


Mortgage backed securities mbs

Mortgage Backed Securities (MBS)

  • STEPS (Investopedia):

  • Real estate buyers borrow from financial institutions.

  • Financial institutions sell mortgages

    to MBS entities.

  • MBS entities form mortgage pools.

  • Individuals invest in mortgage pools.


Types of mbs

Types of MBS

  • Pass-through or participation certificate

    • Direct ownership in pool of mortgages

    • Get pro rata share of all pymts made

    • Prepayment – affects yield

  • Collateralizated Mortgage Obligation (CMO)

    • Pools of pass-through mortgages:

      Pass-Through SecuritiesCMO Issuer Individual Investors


Sequential pay collateralized mortgage obligation cmo

Sequential Pay Collateralized Mortgage Obligation (CMO)

  • CMO issuers - distribute cash flow to bondholders from a series of classes, called tranches.

  • Each tranche holds mortgage-

    backed securities with similar

    maturity and cash flow patterns.

  • CMO issuer – 1st pays stated coupon interest rate to bondholders in each tranche. Principal payments go first to the investors in the first tranches. Once they are paid off, investors in later tranches will receive principal pymts.


Who are the investors in mortgage backed securities

Who are the investors in Mortgage Backed Securities?

  • Foreign governments

  • Pension Funds

  • Insurance Companies

  • Banks

  • Hedge Funds – sophisticated investors

    • U.S. – must be accredited (certain income/net worth)

    • Speculative investments/large risk


Housing bubble burst 2006 2007

Housing bubble burst – 2006/2007

  • Value of securities tied to U.S. Real Estate

  • Qs re/ bank solvency, credit availability,

    Investor confidence

    Caused global stock markets to plummet 2008/2009

    Credit – tightened; trade slowed


Example bnp paribas

Example: BNP Paribas

  • Aug. 9, 2007: "a complete evaporation of liquidity", blocked withdrawals from three hedge funds. The significance of this event was not immediately recognized but soon led to a panic as investors and savers attempted to liquidate assets deposited in highly leveraged financial institutions.


Assignment for next week

  • BNP Paribas is one of the world's largest global banking groups, headquartered in Paris, with its second global headquarters in London.

  • In 2012, BNP Paribas was ranked by Bloomberg and Forbes as the fourth largest bank in the world, as measured by total assets.


Credit default swap aig

CREDIT DEFAULT SWAP (AIG)

  • Explain

  • Insured obligations of fin. institutions

  • AIG received premium in exchange for promise to pay $ to party A if party B defaulted

  • U.S. govt. had to bail it out –

    taxpayers provided over

    $180 billion to AIG (2008/09)


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