Subprime Mortgage

Crisis

Presented by : Anuj Dasot

MBA/07/1230
 Objective of study

 My objective is learning about the

global mess created by so called
“subprime” .Understanding the
various financial instruments, their
structuring, the hidden risks and the
respective returns involved.
 Flow of Presentation
 INTRODUCTION
 PRIME V/S SUBPRIME
 CDO’S AND SECURITIZATION
 THE SUBPRIME MONEY TRAIL
 CAUSES OF SUBPRIME
 EFFECTS
 CONSQUENCES-WORLD OVER
 MAJOR BANKS AFFECTED WORLDWIDE
 IMPACT ON INDIAN ECONOMY
 MEASURES TAKEN
 Prime
 Prime Mortgage

• Borrow <80 % of House price

• Good record from credit bureau

• Monthly payment < 25 % income

• Good Credit Scoring

 Sub-prime

 Sub prime refers to those mortgages targeted

at consumers with impaired or low credit
ratings who may find it difficult to obtain
finance from traditional sources.

 A combination of high interest rates, bad

credit history and murky financial situations
associated with the applicants.
Prime v/s Subprime
 Asset-backed security (ABS)

 Type of bond or note that is based

on pools of assets. Assets are pooled
to make otherwise minor and
uneconomical investments
worthwhile, while also reducing risk
by diversifying the underlying assets.
 Securitization
 Securitization typically applies to assets
that are illiquid (i.e. cannot easily be
sold).
 Common in the real estate industry.
 Investors "buy" these assets by making
loans which are secured against the
underlying pool of assets and its
associated income stream.
 Converts illiquid assets into liquid assets
by pooling, underwriting and selling their
ownership in the form of asset-backed
security (ABS).
 Collateralized debt obligations (CDOs)

 A type of asset-backed security and

structured credit product.
 CDOs divide the credit risk among
different tranches: senior tranches (rated
AAA), mezzanine tranches (AA to BB), and
equity tranches (unrated).
 Losses are applied in reverse order of
seniority and so junior tranches offer
higher interest rates to compensate for
the added risk.
 CDOs Credit Ratings

Senior : AAA

CDOs Mezzanine
AA TO BB

Equity : unrated
 Government
regulators
Financial
Borrowers
Institutions

Mortgage
Underwriters CAUSES Securitization

Central Credit Rating

Banks Agencies
Mortgage
Brokers
 House prices start to fall

Bankruptcy
Sub-prime Crisis
Consequences
Inflation treat

Oil Prices increases

 Impact on Indian Economy
 Monetary policy tightened

 Exports declined

 FII’S withdrew from stock market

 Icici Bank-Worst hit among Indian

banks with a loss of $246m.
Major banks affected worldwide
Measures Taken
The federal reserve

Loan modification

Credit rating agencies

Bank financial health

Media
THANK YOU
WHAT LIES

AHEAD????