subprime mortgage crisis & securitization 19 jan-2014 - v 01.00.05

Securitization and Subprime

Mortgage Crisis

Group (A)

• Walid Zohair

• Wael Morgan

• Mohamed El Garhy

• Ahmed Rostom• Sama Nawar

ESLSCA 43A

International Finance

Dr. Ahmed Bahaa

Agenda

Introduction

What is Securitization

What is Subprime?

What was the Crisis? – The Melt Down

What Caused the Crisis?

Crisis Consequences

Learned Lessons

What is Subprime?

Securitization

Securitization

Elements for Successful

Securitization

Secondary Market for Bonds.

SPV’s – Special Purpose Vehicles.

Large liquid market.

Efficient Rating Companies.

Home Buyer LenderInvestment

Bank

Rating Agencies

AIG(Credit Default Swaps)

Investors

CDO’S

Mortgage Payment

Linked

Advisory

Main Payment

Insurance Against Failure

Sold To

Mechanism of Securitization

Securitization in Egypt

What went wrong?

What went wrong?

What Caused the Crises

What Caused the Crises

1. Housing market

2. Financial markets

3. Governmental policies

4. Other contributing factors

What Caused the Crises

1. Housing market

Boom and bust

Homeowner speculation

High-risk mortgage loans and lending/borrowing practices

Subprime mortgage market (First Lein)

Mortgage fraud and predatory lending

What Caused the Crises

2. Financial markets

Boom and collapse of the shadow banking system

Securitization

Financial institution debt levels and incentives

Credit default swaps

Inaccurate credit ratings

What Caused the Crises

3. Governmental policies

Decreased regulation of financial institutions

Policies to promote affordable housing

Community Reinvestment Act

State and local governmental programs

Government Sponsored Enterprises (GSE) that purchase mortgages, buy and sell mortgage-backed securities (MBS),

What Caused the Crises

4. Other contributing factors

Policies of central banks

Mark-to-market accounting rule

Globalization, technology and the trade deficit

Consequences

Consequences

Consequences

Learned Lessons

Originator sources (underwrites)

loan

Borrower Originator

Lemon

Loan

* The note comes with algebra that solves for our share of

the cash flow waterfall. I think they will send us a check

I don’t see the asset? What do we own again?

We own a CDO. It’s a note* collateralized

by another note which itself is collateralized by a pool of loans

Q&A