sub prime mortgage presentation

8/8/2019 Sub Prime Mortgage Presentation

1/15

The Sub PrimeSaga


2/15

Derivatives are Weapons of MassDestruction


3/15

In The Beginning

Companies Like GMAC, Ford Credit and GE FinancedPurchases and Sold Off Loans

Investors Made Good Returns and CompaniesReplenished Their Coffers To Sell More

These Companies Continued The Process and Kept TheFaith of The Investors

A Market Developed For Securitized Debt


4/15

What Happened???

Americans Began Buying More Homes

Non-Bank Financial Institutions Began Lending

House Prices Rose Americans Continued to Buy Homes

House Prices Continued to Rise

Etc. Etc. Etc.(Supply andD

emand)


5/15

Evolution of the ProcessProspective Homebuyer Wants Loan

The Lender gives loan without checking Credentials at

Subprime rates

The Lender will sell the loan to investment banker who

will create bond to finance the loan

The Investment Banker will then sell the bond

to another investor

The Investment Banker will also sell Credit Default Swap

to another investor to insure the first investor


6/15

What went wr

ong

The whole process happened on the assumption thatHousing prices will always go up so that even if a borrowercannot repay the loan he can sell the House at a higherprice to repay the loan. But when the Housing pricescollapsed the borrower could not repay the loan andhence the lender could not pay the investment banker andhence the Investment Bank could not repay the investorhence the price of credit default swap collapsed and

hence the whole financial world entered crisis.

For example a house which had a worth of $100000 had acredit exposure of nearly $300000 which was three timesthe actual value of the house.


7/15

Fees,

Fees,

Fees

Mortgage Broker Earns a Fee

Lender Earns a Fee

Investment Bank Earns a Fee

Broker Earns a Fee

Servicer Earns a Fee

Investor Earns a Return (Supposedly)

Homebuyer Pays All Fees


8/15

Terms and Meanings Sub Prime Mortgage Borrower

Borrower Has Poor Credit, Will Pay Higher Rate

Mortgage Backed Securities Shares of a Pool of Mortgages Sold to Investors Carry High Rates of Interest for Investors

Home Equity Loans Loans for the Difference Between Mortgage and Value of Home

Foreclosures Borrower Takes Title to Home and Sells It to Repay Loan


9/15

The Hou

sing Bubbl

e House Prices Doubled Between 2000 and 2006

Mortgage Backed Securities Tripled 1996-2007

$7.3 Trillion Worth of MBS in Market in 2007

Mortgage Market in 2008 Banks $8 trillion Traditional Bond Holders $7 trillion Securitized Debt $10 trillion

House Price Increases Moderated in 2006


10/15

Impac

tof

Pric

e Mo

deratio

n Adjustable Rate Mortgages Began to Reset

Borrowers Could Not Refinance

Borrowers Could Not Afford Higher Payments

Borrowers Went Into Default

Lenders Began Foreclosing on Homes

Prices Began To Fall Borrowers Had Negative Equity in Homes


11/15

Statisiti

cs

By 2008

} 9.2% of Mortgages Were Delinquent or in Foreclosure

8.8 Million Homeowners (10.8%) Negative Equity Unsold Homes Equals 9.8 Times Monthly Sales

4 Million Homes Are Unsold (2.9 Million Are Vacant)

Foreclosure Proceedings on 2.3 Million Homes

7.5 Million Sub Prime Mortgages Worth $1.3 Trillion


12/15

The Abu

ses Adjustable Rate Mortgages Enticed Buyers

They Accounted for 80% of Sub Prime Mortgages

Easy Credit Terms Little or No Due Diligence No Confirmation of Income

Mortgage Originators Misled Borrowers

Credit Rating Agencies In Conflict Issue Credit Ratings on Mortgage Backed Securities Consult With Lenders on What Must Be Done To Get AAA


13/15

The Aftermath

Housing Market Is Devastated Prices Are Down, Housing Starts Are Minimal

Credit Markets Have Frozen Value of Investments Have Deteriorated

Banks Have No Capital, Must Sell More Shares

Companies Cannot Borrow

Layoffs and Corporate Bankruptcies Highest

Massive Government Stimulus


14/15

Derivatives are Weapons of MassDestruction

Derivatives are to be used ethically


15/15

With thanks from

Lijo Jacob

Nikhil UppalPriyanka Sharma

Sachin ChavanSubhadip DasTennison Jomy

sub prime mortgage presentation

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