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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;
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


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


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%)
Securitization becomes the dominant funding source for subprime
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
Fall because Private-laber securitized rise
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.


A current boom reaching in 2008 15% more or less, after that the

prices went doing quickly, home prices dont go up forever. The prices of forty
six states had falling prices in the fourth quarter 2007 in total in USA -9.3%.
the prices changed form positive % to negative %, they went done.
The number of months that homes sit on the market, from 2000 to
2005, both the existing homes like new homes, where less than 6 months,
the months that homes sit on markets were decreasesing slowly from 6 in
2000 to 4 months in 2006. It was in 2006 when it started to rise rapidly,
getting to stay more than 10 months on the market.
The foreclosure it is not new, but now the average of deliquent homes
is doubled than before, from 2006 to 2008 the numbers has increased to
more than 1900 Q2 2008 (Q2 2006-670), so the average of annual
foreclosure has reached 1.316.220 from Q3 2006 to Q2 2008.
In 2008 50% is suprime and 42% is prime
In general the 3 percentage of default increased, but the subprime arm
had the worst default record in Q1 2008 got 33.4%, a big peak. 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, single
payment and the ability to plan a budget based on this fixed cost.) got 3%
and the subprime like is normal was higher it reached 11.8%.
1)When the value of an asset falls below the outstanding balance on the loan used
to purchase that asset. Negative equity is calculated simply by taking the value of
the asset less the balance on the outstanding loan.
1) Job losses: number of jobs cut increased largely from about 6,000 to
48,000,which is tripled.(cumulative amount :about 100,000 )
2) Losses: was about 40 billion dollars in Q3 2007, increased by 4 times in Q4
2007, stayed at this number in Q1 2008, and decreased 25% in Q2008.
(cumulative amount :500billion dollars)
3) Capital raise: From less than 20 billion dollars Q3 2007, the growth rate of
capital raised remained at 100% per quarter.(cumulative amount :300 billion
26. Q3 2008, Citigroup: 55.1 billion dollars ; Merrill Lynch: 52.2 billion dollars ;
UBS 44.2 billion dollars ;HSBC: 27.4 billion dollars

1) Financial stock prices take big hits, the most serious case like Washington
mutual and Lehman brothers, their stock prices fell almost 100%.
2) Since the stock price of financial institutions decreased largely and the shares
outstanding cannot change a lot, the market capitalization of banks fell from
142%(AIG) at most to 21%, merely few of them increased a little (Wells Fargo
& JP Morgan)
28. 728 billion dollars
29. The spread continually widened and reached 955.8 bps.
1)LIBOR or ICE LIBOR is a benchmark rate that some of the worlds leading
banks charge each other for short-term loans. 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.
2) Since august in 2007, the average spread jumped from 76 to 130 bps and
reached 313 bps on Sep. 18th ,2008.
31. Credit default spread continually increased with fluctuation between 07/2007
and 09/2008and rose sharply in 08/2008. There are 2 peaks on the curve.
One of them is 03/2008Freddie Mac and Fannie Mae were supported by the
government the spread was 200bps. The other one is AIG rescued on
09/2008, the spread reached 500bps.
32. Commercial paper issuance dries up, In general ,issuance of asset backed
securities is negative, but the absolute value was decreasing. Other issuers in
Q1/2008 was positive for one time.
33. Fed fund rate was cut by federal reserve. 30year fixed mortgage rate remain
relatively flat. Spread widens from 1% up to 2% .Though the government
lowered the Fed Funds rate so that it can plump cash into commercial banks,
commercial banks wouldnt be willing to lend money because of credit default
risk and in-liquidity in mortgage market.
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

Temporary ban on short selling in selected companies

Bailout package?
35.Economists say the economy isnt at its low point yet, and house prices likely
wont get there until 2009. 38% of them think the hitting bottom time is 1st half
2009, while 29% think it is 2nd half 2009
37.Fannie Mae:2003: 1.27 ,2006: 2.12 2008: 2.76
Freddie Mac:2003: 0.94,2006: 1.40 2008: 1.60
These companies are too big with too little capital.
38.Freddie Macs leverage ratio is from 2 to 6.8 times as great as other financial
39.The leverage ratio increased by 4-13 times in other financial institutions
between 2000 and 2007
42.The number rose from 4.7 thousand to 52.9 thousand, increased by 11 times.
43.No. 20-95% of respondents could not correctly identify various loan costs
using current disclosure forms.

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.
B: Value of your house will always go up, we don't need down-payments anymore.
We can give you a really low interest rate for a few years. We'll raise it later, okay?
A: My employer is a prick and might not verify my employment. Would that be a
B: Nope. We can get you a special "Liar's Loan" and you can verify your own
employment and income
A: You're awesome.
B: We don't actually lend you the money - a bank will do that - so we don't really
care if you repay the loan. We still get our commission.
A: Let's get started!
A few weeks later at the bank
First bank of Bankland, Inc. (Open your Christmas Club account today)
(New mortgage life)
X: Should get rid of these crappy mortgage loans. They start up to stink up my
office. 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)

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

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

N: Fuck you.
Fuck you.