Subprime Crisis By: Brad, Mario, Andrew, Matt April 30, 2008.
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Transcript of Subprime Crisis By: Brad, Mario, Andrew, Matt April 30, 2008.
Subprime Crisis
By: Brad, Mario, Andrew, Matt
April 30, 2008
Keep In Mind
OverviewDeregulation
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
Dot.com & 9/11
9/11 Spawned a re-emergence of patriotic spending and owning your own home.
NASDAQ
March 10th 20005132.52
Today2279.1
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• Real estate = Good
Investment
http://bigpicture.typepad.com
Subprime & Alt-A
Automatic Underwriting
Subprime
Alt-A Loan
ARM• Qualification
HI.
(HELOC)
• The culprit
Bull market MBS
“It is is the job of economic policy makers
to mitigate the fallout when it occurs.”
“The provision of such liquidity support undermines the efficient p
ricing of risk…that encourages excessive risk-takingand sows the seeds of a future financial crisis.”
Investment Banks
Moral Hazard
Mervyn King
Rating Agencies
Housing Bust
Supply & DemandFalling Home Pricesdefault 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 overNow 80-95% is rolled overLiquidity problems. clogged
Credit Default SWAPS
A way to hedge
Exploding growthA way to speculate
As of December 22, 2007, the Economist estimated Subprime defaults would reach a level between U.S. $200-300 billion.
Losers24.1 Billion
22.5 Billion
10.3 Billion
17.2 Billion
18.7 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."
AL, Would you like to work for me?
Why Certainly
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 Hispanics55% of African-Americansobtained 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?
• Laissez-faire vs. Regulated markets• How do we prevent similar future crisis
Edward M. Gramlich
“The so called stimulatory impact we got in the early 2000s
when rates were low was due to Subprime borrowing and house spending.”