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Understanding the Subprime Crisis

The document summarizes the subprime mortgage crisis of 2007-2008. It discusses the deregulation of the banking industry in the late 1970s and 1980s, the rise of securitization of subprime loans in the 1990s, the dot-com boom and 9/11 leading to increased housing demand. It describes the housing boom, rise of subprime and Alt-A loans, credit crunch when defaults increased, and effects on the stock market and economy. The crisis resulted in high foreclosure rates, especially among minority groups, and led to government bailouts.

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8 views25 pages

Understanding the Subprime Crisis

The document summarizes the subprime mortgage crisis of 2007-2008. It discusses the deregulation of the banking industry in the late 1970s and 1980s, the rise of securitization of subprime loans in the 1990s, the dot-com boom and 9/11 leading to increased housing demand. It describes the housing boom, rise of subprime and Alt-A loans, credit crunch when defaults increased, and effects on the stock market and economy. The crisis resulted in high foreclosure rates, especially among minority groups, and led to government bailouts.

Uploaded by

brad_dworkin
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Subprime Crisis

April 30, 2008


By: Brad, Mario, Andrew, Matt
Keep In Mind
Overview
Deregulation

Securitization

.com & 9/11

Housing Boom

Housing Bust

Bailout
Deregulation

• 1977- Community Reinvestment Act

• 1980- Depository Institutions and Deregulation


and Monetary control act

• 1995 Revision of (CRA)


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
[Link] & 9/11
March 10th 2000
5132.52
NASDAQ

9/11 Spawned a re-emergence of


patriotic spending and owning
your own home.
Today
2279.1
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
“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
Increase in Demand for Homes
• Securitization
• Rising Home prices
– American home prices increased
by 124% from 1997 to 2006
• Mortgage Broker Incentives [Link]

• Real estate = Good Investment


Subprime & Alt-A

Alt-A Loan

Subprime

Automatic Underwriting
ARM
• Qualification

HI.
(HELOC)

• The culprit
Bull market MBS
Investment Banks
“The provision of such liquidity
support undermines the efficient p
ricing of risk…
“It is is the job
that encourages excessive risk-takingand of economic policy makers
sows the seeds of a future financial crisis.” to mitigate the fallout
when it occurs.”

Moral Hazard

Mervyn King
Rating Agencies
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

Average 60% rolled over


Now 80-95% is rolled over
Liquidity problems.
clogged
Credit Default SWAPS

A way to hedge

A way to speculate
Exploding growth
24.1 Billion Losers
22.5 Billion

18.7 Billion

As of December 22, 2007, the


17.2 Billion Economist estimated Subprime defaults
would reach a level between U.S.
$200-300 billion.

10.3 Billion

9.3 Billion

9.3 Billion
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."
Why Certainly

AL, Would you like


to work for me?
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

People burning homes

Disproportionate levels of foreclosures

46% of Hispanics
55% of African-Americans
obtained mortgages in 2005 with higher cost loans.
Bail out?

• Term Auction Facilities


• Economic Stimulus package
• Lowering FED funds Rate
• Increasing power of the FED
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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