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BA 572 presents: The Subprime Mortgage Lending Market. by Ofer Heyman May 11, 2011. Agenda (interruptions welcome). Understand it! Mortgage and MBS context What is subprime loan? Criteria / Grading History The 2007 Subprime Meltdown Introduction Personal perspective By the numbers

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Presentation Transcript
agenda interruptions welcome
Agenda (interruptions welcome)
  • Understand it!
    • Mortgage and MBS context
    • What is subprime loan?
    • Criteria / Grading
    • History
  • The 2007 Subprime Meltdown
    • Introduction
    • Personal perspective
    • By the numbers
    • Broader effects
    • Myths and Conclusion
mortgages
Mortgages
  • Risk free? / Poor investment?
  • Investor view point!
  • Securities (g)
subprime loans basics
Subprime Loans - Basics
  • What is it?
    • Lower than prime rate? Bad people?
    • Discretization (bb)
  • Major Criteria for Grade A
    • FICO > 660
    • PTI < 0.28 / 0.36 (bb)
    • LTV < 0.95 (bb)
    • Varies in practice
    • A-/B…/D
subprime loans basics3
Subprime Loans - Basics
  • Size proportion (g)
subprime loans history
Subprime Loans - History
  • Milestones leading to the 2007 crisis
    • 1980: Allowing high rates (DIDMCA)
    • 1982: Permitting variable rates and balloons (AMTPA)
    • 1986: Tax Reform Act - prohibited other deductions
    • 1995: MBS with subprime-loan collateral more attractive
    • Late 1990s : rapid growth of highest risk
      • Also, dropped rates  cash out
    • 2000-2005: rapid growth in volume, mainly lower risk
    • 2005-2006: The bubble grows
    • 2006-2007: Bubble bursts, increased rates  defaults
    • 2007-2008: MBS crash
the subprime crisis4
The Subprime Crisis
  • Myths
    • Subprime went only to impaired borrowers
    • Subprime promoted home ownership
    • Decline in home value CAUSED the crisis
    • Subprime mortgages failed because of rate resets
    • Crisis was unexpected
    • Subprime market was too small to cause big troubles

    • Complex system
    • Boom-Bust classic
main sources
Main Sources
  • Videos
    • http://www.youtube.com/watch?v=HSjEyOp2dEM&feature=related
    • http://www.youtube.com/watch?v=q8hjUei-Nwo
  • Papers and Web Sites
    • Ten Myths about Subprime Mortgages (May 9, 2009): http://www.clevelandfed.org/research/commentary/2009/0509.pdf
    • A Snapshot of Mortgage Conditions with an Emphasis on Subprime Mortgage Performance (August 27, 2008): http://www.federalreserveonline.org/pdf/mf_knowledge_snapshot-082708.pdf
    • Wikipedia: http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
    • The Evolution of the Subprime Mortgage Market (Feb 2006): http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf
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