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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
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New Home Sales-Chart 6
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