The subprime crisis
1 / 19

THE SUBPRIME CRISIS - PowerPoint PPT Presentation

  • Uploaded on

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).

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about 'THE SUBPRIME CRISIS' - edana

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
The subprime crisis

  • Gary Klass

  • Pos232

  • It’s a Wonderful LifeIt's a Wonderful Life: Bank Run.  other links 12 3



Fannie MaeFreddie Mac



What can go wrong for lenders
What can go wrong (for lenders)

Depositors run (fix with FDIC, FSLIC)

Interest Rates Rise:

  • Interest on deposits exceeds interest on loan

  • Causes falling housing prices:mortagage exceeds house value

    Interest Rates Fall

  • Homeowner refinances loan

Subprime loans

Subprime loans

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



Mortgage Broker

Subprime, Alt-A, Jumbo Loans



Dow Jones Industrial Average



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)

  • 2004 Fed starts increasing interest rates. Home prices up 25% in CA, FLA. More loans are adjustable (30% vs. 10% in 2001) Homeownership peaks at 69.2%

  • 2005: 22% of mortgages are subprime (8% in 2003). Home prices slow. CRA lower-income market rules relaxed

  • 2006: Interest rates and home prices hit peak.

  • 2007:

    • Subprime market collapses,

    • July: Dow Jones hits 14,000

    • International markets fall.

  • October 2008: Stock Market Falls

Government response to the crisis federal reserve
Government response to the crisis: Federal Reserve

  • Lowers “discount” interest rate to near 0

  • $30 Billion for Bears Stearns buyout

  • $200 Billion to nationalize Fannie and Freddie

  • Buys most of AIG for $182 Billion (or $85B)-- “covers” investors who bought credit default swaps at full value.

  • (2008-9) Buys $300 Billion of US Debt(“monetizes” the debt)

  • Buys $1.25 Trillion in Mortgage-backed securities

Government response to the crisis gw bush tarp troubled asset relief program
Government response to the crisis GW BushTARP: Troubled Asset Relief Program

  • $750 Billion

  • Fall, 2008 (big issue in presidential campaign)

  • Initial purpose: to buy “toxic” mortgage securities

  • Instead: to “buy” the Banks themselves:AIG: $40B CITI $45B Bank of Am. $45BGM: $13.4B Chrysler: 4B

Government response to the crisis ObamaAmerican Recovery and Reinvestment Act of 2009“Stimulus Bill”

  • Feb, 2009: $787 Billion

  • Tax cuts: $288B

  • Health Care: $144B (Medicaid and COBRA)

  • Education: $90B

  • Income assistance: $83B (unemployment, Food Stamps, Social Security bonus)

  • Infrastructure\vehicles\energy $81B

  • Homebuyers tax credit $8000 (until 4/30/10)

  • 2011: The American Jobs Act

College illinois investments
College Illinois Investments