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.”