Subprime crisis
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Subprime Crisis. By: Brad, Mario, Andrew, Matt. April 30, 2008 . Keep In Mind. Overview. Deregulation. Securitization. .com & 9/11. Housing Boom. Housing Bust. Bailout. Deregulation. 1977- Community Reinvestment Act

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Subprime Crisis

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Subprime crisis

Subprime Crisis

By: Brad, Mario, Andrew, Matt

April 30, 2008


Keep in mind

Keep In Mind


Overview

Overview

Deregulation

Securitization

.com & 9/11

Housing Boom

Housing Bust

Bailout


Deregulation

Deregulation

  • 1977- Community Reinvestment Act

  • 1980- Depository Institutions and Deregulation and Monetary control act

  • 1995 Revision of (CRA)


Securitization

Securitization

  • The pooling and repackaging of cash-flow producing financial assets into securities that are then sold to investors.

  • Provides means for Lenders to spread risk across the financial Markets.

  • Securitization of Subprime loans -1997


Dot com 9 11

March 10th 2000

5132.52

Dot.com & 9/11

NASDAQ

9/11 Spawned a re-emergence of patriotic spending and owning your own home.

Today

2279.1


Federal reserve response

Federal Reserve Response

  • Scare of Recession

    • “In this case poor data led to a policy that amplified speculative activity in the housing and other markets”

      • Richard W. Fisher (president of FRB of Dallas)

  • Money is Cheap


  • Subprime crisis

    “The traditional fixed-rate mortgage

    may be an expensive way

    of financing a home.

    American consumers might benefit

    if lenders provided greater mortgage

    product alternatives

    to the traditional fixed-rate mortgages.”

    • FED-2000-2003

      • Fed Funds rate 6.5%-1%


    Housing boom

    Housing Boom

    Increase in Demand for Homes

    • Securitization

    • Rising Home prices

      • American home prices increased by 124% from 1997 to 2006

    • Mortgage Broker Incentives

    • Real estate = Good Investment

    http://bigpicture.typepad.com


    Subprime alt a

    Subprime & Alt-A

    Alt-A Loan

    Subprime

    Automatic Underwriting


    Subprime crisis

    ARM

    • Qualification

    HI.


    Heloc

    (HELOC)

    • The culprit


    Bull market mbs

    Bull market MBS

    “The provision of such liquidity

    support undermines the efficient p

    ricing of risk…

    that encourages excessive risk-takingand

    sows the seeds of a future financial crisis.”

    Investment Banks

    “It is is the job

    of economic policy makers

    to mitigate the fallout

    when it occurs.”

    Moral Hazard

    Mervyn King


    Subprime crisis

    Rating Agencies


    Housing bust

    Housing Bust

    Supply & Demand

    Falling Home Prices

    default rates among Subprime loans

    43% were Subprime ARMs even though these loans only made up 6.8% of the loans outstanding


    Credit crunch

    Credit Crunch

    Average 60% rolled over

    Now 80-95% is rolled over

    Liquidity problems.

    clogged


    Credit default swaps

    Credit Default SWAPS

    A way to hedge

    Exploding growth

    A way to speculate


    Subprime crisis

    Losers

    24.1 Billion

    22.5 Billion

    18.7 Billion

    As of December 22, 2007, the Economist estimated Subprime defaults would reach a level between U.S. $200-300 billion.

    17.2 Billion

    10.3 Billion

    9.3 Billion

    9.3 Billion


    The biggest winner

    The Biggest Winner

    “Most people told us house prices

    never go down on a national level,

    and that there had never been a default

    of an investment-grade-rated mortgage bond."


    Subprime crisis

    Why Certainly

    AL, Would you like

    to work for me?


    Effects on stock market

    Effects on Stock Market

    • Falling U.S. dollar value

    • Crisis has caused panic in financial markets

    • Volatility in the markets has increased dramatically


    Effects on people

    Effects on People

    People burning homes

    Disproportionate levels of foreclosures

    46% of Hispanics

    55% of African-Americans

    obtained mortgages in 2005 with higher cost loans.


    Bail out

    Bail out?

    • Term Auction Facilities

    • Economic Stimulus package

    • Lowering FED funds Rate

    • Increasing power of the FED


    Is the fed helping us

    Is the Fed helping us?

    “The so called stimulatory impact

    we got in the early 2000s

    when rates were low was due

    to Subprime borrowing

    and house spending.”

    • Laissez-faire vs. Regulated markets

    • How do we prevent similar future crisis

    Edward M. Gramlich


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