THE SUBPRIME CRISIS. Gary Klass Pos232 It’s a Wonderful Life It's a Wonderful Life: Bank Run. other links 1 2 3. Depositors. Investors. Depositors. Fannie Mae Freddie Mac. FSLIC – FDIC INSURES DEPOSITS. FHA INSURES MORTGAGE. What can go wrong (for lenders).
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Fannie MaeFreddie Mac
FSLIC – FDICINSURES DEPOSITS
Depositors run (fix with FDIC, FSLIC)
Interest Rates Rise:
Interest Rates Fall
Balloon mortgage: borrower pays only interest for 10 years before a big lump-sum payment is due.
Liar loan: borrower is asked merely to state his annual income, without presenting any documentation.
Option ARM: in which the borrower can pay less than the agreed-upon interest and principal payment, simply by adding to the outstanding balance of the loan.
Piggyback loan: a combination of a first and second mortgage eliminates the need for any down payment.
Teaser loan: artificially low initial interest rate – difference added to loan’s principal.
Stretch loan: borrower has commits more than 50 percent of gross income to make the monthly payments.
NINJA loan -- "No Income, No Job and No Assets."
Mortgage-backed securities(collateralized debt obligations)
Rating Firms:Moody’s S&P
Subprime, Alt-A, Jumbo Loans
Dow Jones Industrial Averagehttp://stlouisfed.org/publications/re/2008/d/pdf/mortgage.pdf
1977 Community Reinvestment Act (CRA)
1986 Only home mortgage interest is tax deductible; home-equity loans become common. Bank interest rates deregulated.
1985-1990 1,000 S&Ls go bankrupt.
2000 Dot-com stock bubble bursts, Fed lowers interest rates
2001 mild recession, Fed lowers rates more
2004 Fed starts increasing interest rates. Home prices up 25% in CA, FLA. More loans are adjustable (30% vs. 10% in 2001)
Fannie Mae and Freddie Mac buy subprime loans Home prices increase (10% on the coasts)