Subpirme Crises

Presented By :Saad Arif Owais Obaid Jibran

Citibank Sub Prime Crises

What is our Presentation about? • We are giving a persuasive presentation to an audience that contains members of Upper management of Citibank and are convincing them to change their policy related to issuing mortgages because of the sub prime crises that arose due to mortgages being sanctioned to Sub Prime lenders. 2

Sub Prime Crises • An ongoing economic problem jeopardizing the existence of banks in general.

• Created liquidity issues in the banking system owing to Foreclosures which accelerated in the United States in late 2006 Triggered a global Financial crises during 2007 and 2008.

3 http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

What does Sub Prime mean? • Sub prime lending refers  practice of making loans to borrowers (who do not qualify for market interest rates)

Involving various risk factors such as Income level Size of the down payment made Credit history Employment status.

4 http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

5 http://news.bbc.co.uk/2/hi/business/7073131.stm

Housing market:An Overview • Subprime borrowing was a major contributor to an increase in home ownership rates and the demand for housing. This demand helped fuel housing price increases and consumer spending. American home prices increased by 124% • The bank was generating money and so it continued issuing Sub Prime mortgages.

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-26#cite_note-26

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Housing market:An Overview • Overbuilding during the boom period, increasing foreclosure rates and unwillingness of many homeowners to sell their homes at reduced market prices have significantly increased the supply of housing inventory available.

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-MSNBC-newhome-30#cite_noteMSNBC-newhome-30

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Housing market:An Overview • This excess supply of home inventory places significant downward pressure on prices. As prices decline, more homeowners are at risk of default and foreclosure. • As of February 2008, housing prices are expected to continue declining until this inventory of surplus homes (excess supply) is reduced to more typical levels.

• http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-economist-downtown-32#cite_note-economist-downt •http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-Ofheo-3q07hpi-33#cite_note-Ofheo3q07hpi-33

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Housing market:An Overview • Easy credit, combined with the assumption that housing prices would continue to appreciate, also encouraged many subprime borrowers to obtain ARMs they could not afford after the initial incentive period.

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-34#cite_note-34

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http://www.forbes.com/finance/mktguideapps/compinfo/Advan cedChart.jhtml?symbol=C

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http://www.forbes.com/finance/mktguideapps/compinfo/Advan cedChart.jhtml?symbol=C

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Process • Owing to a form of financial engineering called Securitization. •

many mortgage lenders had passed the rights to the mortgage payments and related credit/default risk to third-party investors via  Mortgage backed Securities (MBS).  Collateralized debt obligation (CDO).

12 http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

How did the Crises start? • Due to Sub Prime lending. • Bursting of the Us House Bubble. • High default rates on “Sub prime" and other Adjustable Rate Mortgages (ARM) made to 

higher-risk Borrowers with lower income.



higher-risk Borrowers with lesser credit history

than "prime"

borrowers. 13 http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

Growth of Sub Prime lending • By 2005 , one in five mortgages were sub-prime.

• House prices were high, and it was difficult to become an owner-occupier.

14 http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

Graphical Analysis

Process

Contd… http://news.bbc.co.uk/2/hi/business/7073131.stm

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Contd…

16 http://news.bbc.co.uk/2/hi/business/7073131.stm

Mortgage Bond Market

17 http://news.bbc.co.uk/2/hi/business/7073131.stm

Citibank’s Mistake? • Poor judgment by Citibank. • Credit Risk under estimated by Citibank. • Mortgage brokers focused their efforts by selling sub-prime mortgages in working class black areas where many people had achieved home ownership. • Mortgage brokers told them that they could get cash by refinancing their homes, but often neglected to properly explain that the new sub-prime mortgages would "reset" after 2 years at double the interest rate.

http://www.dailytimes.com.pk

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Citibank’s Mistake? • Underwriters determine if the risk of lending to a particular borrower under certain parameters is acceptable. In 2007, 40 percent of all subprime loans were generated by automated underwriting.

http://en.wikipedia.org/wiki/Mortgage_underwriting

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Consequences of the mistake for Citibank?

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http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=C

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http://en.wikipedia.org/wiki/Image:Borrowing_Under_a_Securitization_Structure.gif

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Consequences for Citibank? • face $18.7 billion in additional write-downs for the quarter. • Citibank is expected to slash its $2.16-a-share annual dividend by an eye-popping 40%. • Citibank is expected to report a loss of $1.33 a share. • third-quarter profits fell 56.8% to $2.4 billion, or 47 cents a share, from $5.5 billion, or $1.10 a share. • Salvage assets of seven affiliated structured investment vehicles valued at $49 billion by putting those assets onto its balance sheet. Contd…

http://www.dailytimes.com.pk

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Contd.. • Citibank agreed to a $7.5 billion equity investment from the Abu Dhabi Investment. • The firm has a serious need to preserve/raise additional capital. • A wave of repossessions is sweeping America as many of these mortgages (ARM) reset to higher rates in the next two years. • Goldman Sachs analyst William Tanona predicted 24 big write-downs for Citigroup. http://www.dailytimes.com.pk

Graphical Analysis

Contd… http://news.bbc.co.uk/2/hi/business/7073131.stm

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Contd.. • Increase in liabilities recorded by Citibank.

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Contd..

27 http://news.bbc.co.uk/2/hi/business/7073131.stm

Solutions for Citibank •

Rely on data from only certified and reliable Credit Rating Agency.

• The rating processes can be re-examined and improved to encourage greater transparency to the risks involved with complex mortgage-backed securities and the entities that provide them. • Have few but reliale brokers who don’t mislead and misdirect people for their own commission.

Contd…

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Contd.. Citibank should: • Change lending practices (Check proofs of income etc) (False Salary slips given by people). • Improve on bankruptcy protection. • Give credit counseling and education to customers. • Check carefully licensing and qualifications of lenders. • Using Media to increase people’s awareness. 29

REFRENCES

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http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

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http://news.bbc.co.uk/2/hi/business/7073131.stm

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http://www.dailytimes.com.pk/default.asp?page=2007%5C11%5C04%5Cstory_4-11-200

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http://upload.wikimedia.org/wikipedia/en/0/09/Subprime_diagram.pn g

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http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=C

• Solutions (Slide# 28 and 29) have been written by us after analyzing the case of Citibank issuing sub prime loans and we have made these solutions keeping into account the problems faced by them and then giving solutions for these problems. 30

☺ Thank You for your Patience. ☺

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