Subprime Project

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

Dot.com & 9/11 NASDAQ

March 10th 2000 5132.52

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 • Real estate = Good Investment

http://bigpicture.typepad.com

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… that encourages excessive risk-takingand sows the seeds of a future financial crisis.”

Moral Hazard

Mervyn King

“It is is the job of economic policy makers to mitigate the fallout when it occurs.”

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 17.2 Billion 10.3 Billion 9.3 Billion 9.3 Billion

As of December 22, 2007, the Economist estimated Subprime defaults would reach a level between U.S. $200-300 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