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Subprime Meltdown

Date post: 10-Apr-2018
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    ``This was one of the biggestbubbles we've ever had in credit.

    I have been and am still short theinvestment bankers in America. I'm

    also short homebuilders''

    Jim RogersCommodity Guru

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    SUBPRIME MELTDOWN

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    What is Sub-prime Loans??

    Loans made to someone having low credit scores,histories of payment delinquencies, charge-offs,or bankruptcies Chart-1

    Many sub-prime borrowers are paying 10% to12%, compared to 6% to 8% on standard or

    primeloans

    Sub-prime loan accounts for 14% of overallmortgage debt Chart-2

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    Sub-Prime Mortgage Originations

    0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    25.0%

    1998 1999 2000 2001 2002 2003 2004 2005 2006

    Origination Year

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    Reasons for Rise

    Legislative: The Community Reinvestment Act of1977>home ownership to 69% of house holds Chart-3

    Risk/Return: Lenders started to price more for the riskrather than avoiding it

    Exotic Loans: Loans like 2/28,3/27, IO only,

    Securitization: Stronger appetite for riskier securities

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    SO WHAT ????

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    Mortgage Delinquency Rates 2001-07

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    Where the problem is??

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    Reasons for the Problem

    MBA says about 1.1trillion to 1.5 trillion in floating ratemortgages will adjust in 2007, but expects half to berefinanced.

    Poor underwriting standards Chart-4

    Predatory lending

    String of 17 interest rate hike from 1% to 5.25%

    Chart-5

    Claim for repurchase of loans previously sold Declining market for sub-prime loans

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    Repercussions

    Effect on Wall Street Firms

    CDOs made the trick

    Effect on Sub-prime Originators

    More than 20 firms went belly-up

    Effect on the Housing Market

    Chart-6 Effect on the Economy

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    Heading to??

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    Possible Measures

    Financial Regulators can

    Require proper disclosures by lenders that helpconsumers make informed decision

    Prohibit abusive practices through appropriaterules

    Promote industry participants to establish

    self-regulatory organization Provide supervisory oversight

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    THANX

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    U.S FICO Score Distribution Chart 1

    Credit scores ranges from 300 850

    Prime: >720 Alt-A: 620-720

    Sub-Prime:

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    Mortgage Universe-Chart 2

    BACK

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    House Ownership Chart-3

    BACK

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    Underwriting Standards-Chart 4

    BACK

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    Fed Rate-Chart 5

    BACK

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    New Home Sales-Chart 6

    BACK


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