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
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 http://bigpicture.typepad.com

• 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