Ba 572 presents the subprime mortgage lending market
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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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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

    • Broader effects

    • Myths and Conclusion


Mortgages

  • Risk free? / Poor investment?

  • Investor view point!

  • Securities (g)


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 - Basics


Subprime Loans - Basics


Subprime Loans - Basics

  • Size proportion (g)


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 Crisis


The Subprime Crisis


The Subprime Crisis


The Subprime Crisis


The Crisis – broader effect


The Crisis – broader effect


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

  • 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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