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The Mortgage Crisis

The Mortgage Crisis. PLS 480 Greed and Need Dr. Emerson. Sub Prime Problem. Delinquency rate 2 tenths of 1 % in 1979 Today 2% (10 times higher) Moyer’s Report http://www.pbs.org/moyers/journal/07182008/watch.html. Context: Regulate or Deregulate.

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The Mortgage Crisis

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  1. The Mortgage Crisis • PLS 480 Greed and Need • Dr. Emerson

  2. Sub Prime Problem • Delinquency rate 2 tenths of 1 % in 1979 • Today 2% (10 times higher) • Moyer’s Report http://www.pbs.org/moyers/journal/07182008/watch.html

  3. Context: Regulate or Deregulate • Constitution requires Congress regulate banks • Congress leaves regulation to States. • In 1913 FED authorized by Congress.

  4. Little Regulation Until New Deal • Unregulated stock market • Bank’s heavily invested in stocks • Deposits not insured

  5. Regulation • Glass Steagall Act • FDIC • Security & Exchange Commission • Freddie Mac/ Fannie Mae • HUD in 1960s

  6. Deregulation • Deregulation of S&Ls • No regulation of “derivatives” • Mortgages may be sold in fractions.

  7. Deregulation Continues • Savings/Loan Scandal • Congress repeals Glass Steagall Act in 1999.

  8. Federal Reserve Bank Policies • Low interest rates • Sub primes unregulated • No regulation of ‘innovative financing’ • No action regarding defaults

  9. What is market response? • Over price houses • Piggy back sub primes with regulated ‘primes’ • Little or no documentation of house/buyer

  10. GAO Report • No piggyback and documentation0% defaults • Piggyback OR little documentation 25-31% • Piggyback AND no documentation = 60%

  11. Why No Demands by Lenders? • Don’t know- ‘decoupling’ • If fail then resell at higher price • Loan is asset not borrower’s capacity to repay

  12. Evidence • Mortgage type and loss to homeowner and investor (Mortgage Banker Association) • Spillover of Mortgage Subprime to Prime trends (First American Loan Performance) • Stock Market Performance (Dow Jones Industrial Average) • Jobs (Bureau of Labor Statistics) • Recover of US (OECD)

  13. Foreclosures By Mortgage Type • Which type serves mortgage buyer AND homeowner? • Difference between red bar, green and yellow?

  14. Relationship of Primeto Sub-prime • Spillover of subprime default on prime. • Top line =subs but bottom line =primes

  15. Stock Market Learning Curve • Dips and peaks in stock market performance 2000- July 2009 • Prior dip July2003. Why?

  16. JOBS • Impact of policies on jobs(Bureau of Labor Statistics)

  17. Recovery Comparison • US System Recovery versus other Industrialized Democracies • Red line US vs. France, Germany and Japan(OECD)

  18. Break • Be back in 10 minutes for the analysis

  19. Finish this lecture: (7 groups) • Dem. Capitalist –explain • Dem. Capitalist –policy opt. • Dem. Socialist—explain • Dem. Socialist – policy opt. • Conservatives interpretation • Liberal interpretation • Madison interpretation/options

  20. Democratic Capitalists Explain • Democratic Capitalist explain evidence ---

  21. Democratic Capitalists • Future Policy Preference • Reasoning

  22. Democratic Socialist • Democratic Capitalist explain evidence ---

  23. Democratic Socialist • Future Policy Preference • Reasoning

  24. Conservative • Interpretation of Evidence and Meaning

  25. Liberal • Interpretation

  26. Madison Model • Interpretation/Explanation • Policy Options

  27. Conclusion • Justice is the end of government. It is the end [purpose] of civil society. It ever has and ever will be pursued until liberty is lost.. Madison, FP 51

  28. Citations • Alford, Rob (2003). What are the origins of Freddie Mac and Fannie Mae. Accessed August 28, 2008 at http://hnn.us/articles/1849.html. • Bitner, Richard (2008). Inside the Subprime Debacle. U.S. News and World Report. 145 (2) 12. • GAO Report (2007) Briefing to the Committee on Financial Service, House of Representatives. GPO: Washington, D. C.

  29. Citations • Jost, Kenneth (2008). Financial Crisis. CQ Researcher 18(18), 409-422 • Phillips, Kevin (2002). Wealth and Democracy. New York: Random House. • Reynolds, Maura. (2008). Mortgages: Loan troubles hit new heights: foreclosure rate climbs to 2% for the 4th quarter. Home equity drop. Los Angeles Times. C-1.

  30. Q and A

  31. Postscript • Define issue • Use Library Resources, no Wikipedia(https://blackboard.csupomona.edu/webapps/login/) • See http://www.csupomona.edu/~library/databases/politicalscience.html

  32. Postscript (cont.) • Use correct APA citations. See: http://owl.english.purdue.edu/owl/resource/560/01/ • Looking for: timely, data (e.g. GAO), both sides of issue. NOT http://www.hillbillyreport.com/blog/bear_stearns//

  33. Postscript (cont.) • Analysis: Freedom, Liberty, Reason and Justice • Conclusions and Opposition argument • Power Point: Common Errors (http://www.youtube.com/watch?v=HLpjrHzgSRM)versus http://www.youtube.com/watch?v=vXFi7AdhhGk&feature=related (good example)

  34. Sub-prime mortgages The end

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