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Residential mortgage market: $14.

7 trillion
1) Prime: 91.6% Subprime: 8.4%
2) By combining mortgages into one large pool, the issuer can divide the large
pool into smaller pieces based on each individual mortgage's inherent risk of
default and then sell those smaller pieces to investors. 58%
3) 53 million; 5 million
4) Foreclosure is a legal process in which a lender attempts to recover the
balance of a loan from a borrower who has stopped making payments to the
lender by forcing the sale of the asset used as the collateral for the loan;
2.8%
1.48 million homes in the foreclosure
5) Record low from June 25, 2003, to June 30, 2004: 1% ;
6) A credit crunch (also known as a credit squeeze or credit crisis) is a
reduction in the general availability of loans (or credit) or a sudden tightening
of the conditions required to obtain a loan from the banks.
7) Low interest rates and home price bubble
8) 2006; 2005
9) Payment history, amounts owed, length of credit history, new credit and
types of credit in use
10)

DEFINITION OF 'ADJUSTABLE-RATE MORTGAGE - ARM': A type of

mortgage in which the interest rate paid on the outstanding balance varies
according to a specific benchmark. ARM share grows, following low interest
rates
Subprime is taking out ARMs
11)

INCREASE RAPIDLY

12)
3 TRILLIONS; 20.1% (SUBPRIME’S SHARE)
13)
The mortgage model switches from originate-to-hold to originate-todistribute (1980 securitized 15.6%, held in portfolio 84.4%; 2008 securitized
59%, held in portfolio: 41%)
14)
Securitization becomes the dominant funding source for subprime
mortgages
15)
Fannie Mae and Freddie Mac are rather similar. they were set up by the
government to purchase mortgage loans from banks so they could have more
money to lend. Ginnie Mae are the government sponsored loans, such as
FHA.
16)
Fall because Private-laber securitized rise
17)
The ratio of home price to household income surges, reaching in 2005
4.69%, after that it decreased to 4.29% and was still going down. The debt to
income ratio of household has increased rpidly, from 100 more or less to
139.5%, what means that home mortage debt and disposible personal
income raised a lot in those years.

4%. home prices dont go up forever. both the existing homes like new homes. the months that homes sit on markets were decreasesing slowly from 6 in 2000 to 4 months in 2006. from 2000 to 2005.000. 2)44. Merrill Lynch: 52. but now the average of deliquent homes is doubled than before.8% 24. Q3 2008. 1) Job losses: number of jobs cut increased largely from about 6.1 billion dollars . the growth rate of capital raised remained at 100% per quarter. single payment and the ability to plan a budget based on this fixed cost.which is tripled.2 billion dollars .8%. from 2006 to 2008 the numbers has increased to more than 1900 Q2 2008 (Q2 2006-670). The prime FRM(payment amounts and the duration of the loan are fixed and the person who is responsible for paying back the loan benefits from a consistent.000 to 48. a big peak. they went done. getting to stay more than 10 months on the market. after that the prices went doing quickly.2 billion dollars . and decreased 25% in Q2008. UBS 44.32.) got 3% and the subprime like is normal was higher it reached 11. where less than 6 months. 20) The foreclosure it is not new.316. increased by 4 times in Q4 2007. 19) The number of months that homes sit on the market. so the average of annual foreclosure has reached 1. 21) In 2008 50% is suprime and 42% is prime 22) In general the 3 percentage of default increased. 1)When the value of an asset falls below the outstanding balance on the loan used to purchase that asset.3%. 23. It was in 2006 when it started to rise rapidly.18) A current boom reaching in 2008 15% more or less. Negative equity is calculated simply by taking the value of the asset less the balance on the outstanding loan.HSBC: 27. Citigroup: 55.4 billion dollars . the prices changed form positive % to negative %.220 from Q3 2006 to Q2 2008. The prices of forty six states had falling prices in the fourth quarter 2007 in total in USA -9.(cumulative amount :about 100.(cumulative amount :300 billion dollars) 26. stayed at this number in Q1 2008. but the subprime arm had the worst default record in Q1 2008 got 33.000 ) 2) Losses: was about 40 billion dollars in Q3 2007. (cumulative amount :500billion dollars) 3) Capital raise: From less than 20 billion dollars Q3 2007.7% 25.

31. commercial banks wouldn’t be willing to lend money because of credit default risk and in-liquidity in mortgage market. There are 2 peaks on the curve. 2) Since the stock price of financial institutions decreased largely and the shares outstanding cannot change a lot. 18th . the market capitalization of banks fell from 142%(AIG) at most to 21%. the most serious case like Washington mutual and Lehman brothers.27.2008. Commercial paper issuance dries up. Fed fund rate was cut by federal reserve. 1) Financial stock prices take big hits.8 bps. the spread reached 500bps. 30year fixed mortgage rate remain relatively flat.HOPE NOW � The Economic Stimulus Act of 2008 � Housing and Economic Recovery Act of 2008 � Conservatorship of Fannie Mae and Freddie Mac � Temporary guaranty program for money market funds . Spread widens from 1% up to 2% .issuance of asset backed securities is negative. The other one is AIG rescued on 09/2008. 1)LIBOR or ICE LIBOR is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. 2) Since august in 2007. In general . but the absolute value was decreasing. It stands for Intercontinental Exchange London Inter bank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. merely few of them increased a little (Wells Fargo & JP Morgan) 28. 30. 34. The spread continually widened and reached 955.Though the government lowered the Fed Funds rate so that it can plump cash into commercial banks. One of them is 03/2008,Freddie Mac and Fannie Mae were supported by the government , the spread was 200bps. the average spread jumped from 76 to 130 bps and reached 313 bps on Sep. 32. Credit default spread continually increased with fluctuation between 07/2007 and 09/2008,and rose sharply in 08/2008. 33. 728 billion dollars 29. their stock prices fell almost 100%. Other issuers in Q1/2008 was positive for one time.

Would that be a problem? B: Nope. Inc.56% 42. while 29% think it is 2nd half 2009 36.9 thousand. and house prices likely won’t get there until 2009. 43. They start up to stink up my office.51% 41.so we don't really care if you repay the loan. we don't need down-payments anymore.a bank will do that . increased by 11 times. A: Let's get started! A few weeks later at the bank First bank of Bankland.27 .12 2008: 2.The number rose from 4.2006: 2.76 Freddie Mac:2003: 0.The leverage ratio increased by 4-13 times in other financial institutions between 2000 and 2007 40. 38% of them think the hitting bottom time is 1st half 2009. We'll raise it later.40 2008: 1. B: Value of your house will always go up.7 thousand to 52.Stockton Subprime primer At the Ace Mortgage Broker's (We make your dreams come true) A: Buy a house but haven't saved any money for a down-payment and cannot afford the monthly payments.94. 20-95% of respondents could not correctly identify various loan costs using current disclosure forms. 44. okay? A: My employer is a prick and might not verify my employment. (Open your Christmas Club account today) (New mortgage life) X: Should get rid of these crappy mortgage loans. We can give you a really low interest rate for a few years. 38. B: We don't actually lend you the money .8 times as great as other financial institutions’. 39.2006: 1. We still get our commission.No.60 These companies are too big with too little capital. We can get you a special "Liar's Loan" and you can verify your own employment and income A: You're awesome. Smart guys in New York will buy them and perform their financial magic! I'll call them right away! (Let's see what smart guys are doing) .Fannie Mae:2003: 1.Economists say the economy isn’t at its low point yet.15% 37.� Temporary ban on short selling in selected companies � Bailout package? 35.Freddie Mac’s leverage ratio is from 2 to 6.

If we pool them together. not ours. we promise to pay investors holding the good traunch first. risky mortgage loans. we haven't really gotten rid of them. school boards in Kansas . of course not. not all. Don't we have to show them on our balance sheet? Boss: No. The fancy name for it is "Special Purpose Vehicle" or SPV. individually these are pretty crappy loans. If we do that. Call it a CDO (or maybe CMO). in the AAA to the A range. but since we are only using the smelly mortgages as collateral on an entirely new security. I don't get it. "The Not-so-good". Now who are we selling the three pieces to? Boss: The assholes at the SEC won't let us sell these stuffs to widows and orphans. small towns in Norway. Y: But crap is crap. They will likely give the Not-so-good piece a BBB to B rating. The guys who write the accounting rules allow us to set up a shell company in the Caymen Islands to take ownership of the mortgages. "The Ugly". Y: So you have managed to create AAA and BBB securities out of a pile of stinky. We will buy bond insurance for the Good price. And since housing prices will always go up. We can sell that CDO to investors and promise to pay them back as the mortgages are paid off.to anyone who is looking for a high quality safe investment. The crap goes on their balance sheet. we have little worry. the Rating agencies will give it a really great rating. Y: No one would buy the Ugly piece? Boss: of course not. but wait. Y: This is all great. Y: But who's gonna buy this crap boss? Boss: I've got it. so let's sell it to the sophisticated institutional clients. first. we create a new security and use these crappy mortgages as collateral. Like insurance companies. and the ugly investors last. .RSG Investment Bank of Wall Street (Trust the Really Smart guys for All your investment needs) Boss: Better to get rid of shitty mortgages before they attract flies. we pay them lower interest rate than other guys right? The not-so-good will get a better interest rate and the ugly get a nice fat interest rate. we keep that piece and pay ourselves a handsome interest rate. Boss: Exactly. CDO will work like this: It will be made up of 3 pieces (or traunches) and we'll call them "The Good". Ya genius. still pretty good. banks. Boss: Sure. We won't even bother asking them to rate the Ugly piece. Y: Because the good investors have the least risk. We pay the not-so-good investors second. only some of them will go bad. it gets better. If some of the mortgages fail.

. Frankly. Judge: Blow me Gee. It seems that the assholes who took out the mortgages backing your CDO aren't able to pay them off. N: Wait a minute! We bought the AAA "Good" piece of the CDO. Let's drop in to see the Accountants Office of the Czar of Accounting "No nit too small to pick" Sir. I assure you that we are as disappointed as you are. I demand that you force our financial institutions to show greater transparency and openness in their financial reporting. that was a bad assumption. as an investor and a concerned citizen. what the hell is up? We're not receiving our monthly payments. What am I supposed to tell my villagers? Invest: Tell them you fucked up.. You know? The safe one.S financial system that investors not know about these complex transactions and what is behind them.Y: That's great. aren't just we moving our own crap around? Boss: Sure.. They fucked up. Norwegian Village Pension Fund: Hey man. RSG Investment Bank: Yeah. but why would they let us do that. I meant to call you but it's been really crazy around here. N: Well that's just great. but we have convinced them that it is vitally important to the health of the U. we never saw it coming. N: But you told me that housing prices always go up and that your borrowers could always refinance their mortgages! Invest: Yeah. Invest: Unfortunately the loans were quite a bit crappier than we originally thought and there is very little cash coming in. Sorry N: Bad assumption my frigid Norwegian ass! What about the rating AAA from the agencies? Invest: They fucked up too N: But this security was insured! What about the insurers? Invest: Are you kidding? There's no way they have enough money set aside to cover this mess. asshole. We're supposed to be getting paid first. We fucked up.

Fuck you. .N: Fuck you.