the subprime crisis
TRANSCRIPT
• What is subprime & prime?• What is crisis?• How subprime crisis developed?• Housing bubble burst• Subprime crisis: losses• Response to the crisis
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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
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• An unstable and dangerous situation - individual, group, community or whole society.
• Negative changes - economic, political, social or environmental affairs,
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WHAT IS CRISIS……???
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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
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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
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America faced BUBBLE trouble!
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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
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Housing market: 3 Mil.
Foreclosures (2008)
Banking : $1-$2 tril. Bailout
World stock: 50% loss, $30 tril. Wealth disappeared (2008)
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• 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
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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
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