U.S.

Subprime Mortgage Crisis

HEENA BARENDIYA AKSHATA BHATADE NIKITA BHOOTA AKANKSHA GUJAR ADITI LAKHOTE SWATI PATHARE RAHUL SAWANT 05 06 08 19 30 38 51

Introdution
Meaning Of:

Subprime

Subprime Crisis

New Model of Mortgage Lending

Source: BBC News

Causes of the Crisis

The Housing Downturn

Excess supply of home inventory Sales volume of new homes dropped Reduced market prices (10.4% 12/06-12/07) Increasing foreclosure rates

Borrowers

Difficulties in re-financing Begin to default on loans Walk away from properties Fraudulent misrepresentations

Causes of the Crisis

Financial Institutions

Attraction from high returns Offered high-risk loan and incentives Believes that will pass on the risk to others

Securitization

Mortgage backed securities Risk readily transferred to other investors From 54% in 2001 to 75% in 2006

Causes of the Crisis

Government and Regulators

Community Reinvestment Act, encourages the development of the subprime debacle Glass-Steagall Act contributes to the subprime crisis (FDIC back up)

Central banks

Less concerned with avoiding asset bubbles React after bubbles burst to minimize the impact No determination on monetary policy Institutions risk more because of Feds rescue

Direct Impacts of the Crisis

Stock Market

Dow Jones had dropped below 13,000 from Julys 14000 First 3 weeks of 08, the Dow Jones Industrial Average fell 9% Dow Jones/0.5%, S&P 500/0.6%, and NASDAQ/0.3% 21/09/08 (black Monday) the worlds biggest falls since Sept. 11, 2001

Direct Impacts of the Crisis

Financial Institutions Bankruptcy

New Century Financial (USA) Apr. 2, 2008 American Home Mortgage (USA) Aug. 6, 2008 Sentinel management Group (USA) Aug. 17, 2008 Ameriquest (USA) Aug. 31, 2008 NetBank (USA) Sept. 30, 2007 Terra Securities (Norway) Nov. 28, 2008 American Freedom Mortgage Inc. (USA) Jan. 30, 2008

Direct Impacts of the Crisis

Financial Institutions Write-Downs

Citigroup (USA) - $24.1 bln Merrill Lynch (USA) - $22.5 bln UBS AG (Switzerland) - $16.7 bln Morgan Stanley (USA) - $10.3 Credit Agricole (France) - $4.8 bln HSBC (United Kingdom) - $3.4 bln Bank of America (USA) - $5.28 bln CIBC (Canada) 3.2 bln Deutsche Bank (Germany) - $3.1 bln

By 02/19/08 losses or write-downs > U.S. $150 bln Be expected exceeding $200 - $400 bln

Domestic Impacts of the Crisis

Home Owners

Housing prices down 10.4% in year-ago Sales of new homes dropped by 26.4% in The inventory of unsold new homes stood at 9.8 months, the highest level since 1981. Two million families will be evicted from their homes

Minorities

Disproportionate level of foreclosures in minority 46% Hispanics, 55% blacks got higher cost loans

Domestic Impacts of the Crisis

Economy Condition

Recession Low GDP growth rate Business close out or lose money (banks, builders etc.) Weak financial market Low consumer spending Lose jobs Credit card Car loan

Other credit markets

Global Impacts of the Crisis

Investors will be very cautious to act

Lack confidence in stock/bound market Lack of cash or unwilling to spend U.S. economy condition will affect global economy Lose businesses Lose jobs Economy slow down

Consumer spending will slowdown

World economy slip into recession

GDP growth will be low

Global Impacts of the Crisis

Financial market

May take long time to recover Slow economy increase unemployment rate

Unemployment rate may be high

Government and Central Banks Actions

08/2007, President Bush announced Hope New Alliance 02/13/08, President signed a tax rebates of $168 bln 09/18/07, the Fed dropped rate point 10/31/07, point cut by Fed 12/11/07, point cut by Fed 01/22/08 the Fed slashed the rate by 3/4 points to 3.5% 01/30/08 another cut of 1/2 points to 3% Central Banks have pumped billions of dollars to banks Central Banks of the world have done the same thing

Thank You!