• What is subprime & prime?• What is crisis?• How subprime crisis developed?• Housing bubble burst• Subprime crisis: losses• Response to the crisis

2

PRESENTATION OUTLINE

PRIME LOANS AND SUBPRIME LOANS

• PRIME - borrowers - good credit - lower interest - low rates compared to subprime

• SUBPRIME - borrowers - bankruptcies, defaults, or late payment histories

3

• An unstable and dangerous situation - individual, group, community or whole society.

• Negative changes - economic, political, social or environmental affairs,

4

WHAT IS CRISIS……???

5

HOUSING BUBBLEDEVELOPMENT………

THE SUBPRIME MORTGAGE CRISIS

• Until 2006, US housing market - flourishing - so easy to get a home loan

• Subprime mortgages - expectations - home price - continue to

rise - refinance their home - before the higher interest rates were to go into effect

• 2005 - peak of the subprime boom - 1 in 5 was subprime

• Reset – higher interest rate – higher amount / Month

6

Large Loan given at low rate of interest

FINANCIAL INSTITUTUION/INVESTMENT BANK

Small loans distributed at high rate of interest

Money is Invested

HIGH profits

7

America faced BUBBLE trouble!

8

Sources:Glick R. & lansing K. J. 2010. “Global Household Leverage, House Prices, and Consumption”. FRBSF Economic Letter. http://www.frbsf.org/economic-research/publications/economic-letter/2010/january/global-household-leverage-house-prices-consumption/

THE SUBPRIME MORTGAGE CRISIS

• Defaults (Borrower) – Foreclosure (Bank) – Auction (Bank)

• Auction (Bank) - Sell lower price – inadequate to close –

difference to be paid (Borrower)

• Selling homes - PROBLEM – home prices ↓ - not enough to cover

the mortgage

• In US

Housing market: 3 Mil. Foreclosures (2008)Banking sector: $1-$2 tril. BailoutWorld stock markets: 50% loss, $30 tril. Wealth disappeared (2008)

Subprime Defaulters

Bankrupt

FINANCIAL INSTITUTUION/INVESTMENT BANK

Bankrupt Investor House

10

Housing market: 3 Mil.

Foreclosures (2008)

Banking : $1-$2 tril. Bailout

World stock: 50% loss, $30 tril. Wealth disappeared (2008)

11

• losses were not incurred by homeowners but by the financial system.

• Large losses were incurred by the following groups:- Mortgage lenders- Investment banks- Foreign investors - Insurance companies

12

THE SUBPRIME MORTGAGE CRISIS : Losses

• US: Bailout Package – around $800 bn

• Emergency Economic Stabilization Act of 2008 and the Homeowners Affordability and Stability Plan.

• A bill called the Derivatives Markets Transparency and Accountability Act of 2009 – to regulate the CDS market.

Responses to the Crisis

13