Presented by:

Aditya Laksmana
Bima Ruditya
Estie Nurina
Hanif Widyanto
Inge Aliwarga

US SUBPRIME
MORTGAGE CRISIS
SUBPRIME
MORTGAGE
explained
Risk is reduced through
“credit enhancement”

• Requires additional collateral,

A type of mortgage that is
normally made out to borrowers
(prospective homeowners) with
lower credit ratings
insurance, or other third
party agreements
• Compensation for lender
in case the borrower
defaults

Interest rate charged is higher

than a conventional mortgage
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CREDIT ENHANCEMENT
explained

credit risk borrower’s false image

credit rating of good
decreases
goes up credit (AAA)

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CREDIT TRUSTEE
ENHANCEMENT Special Purpose
mechanism Vehicle

Reference Portfolio Securities

AAA
Loan ABS CDS
AA
Loan ABS CDS
ABS CDS A
BBB
Bond Other BB+ or <
Bond CDOS

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New model of Mortgage Lending
Normal Default
 US Subprime Mortgage Crisis

KEY
EVENTS
leading to the crisis
 KEYEVENTS
SUBPRIME leading to the crisis

MORTGAGE
CRISIS
{ Set of events leading to FINANCIAL CRISIS and RECESSION in 2008 }
Brief Timeline
Sharp rise in home $1.3 Trillion subprime The delinquency rate
Only 9% in 1996, 13%
foreclosures in late mortgage as of March had risen to 21% by
in 1999, 20% in 2006
2006 2007 2008

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 KEYEVENTS
leading to the crisis

1) Housing price increase during 2000-2005

followed by levelling off and price decline
Index, January 1987 = 100 Home prices peak in 2006
600

California median
500 home price

400
S&P/Case-Shiller
home price index
300

200
OFHEO
conventional and
100
conforming home
price index
0

9 87 988 989 990 991 992 993 994 995 996 997 998 999 000 001 002 003 004 005 006 007 008
1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2
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 KEYEVENTS
leading to the crisis

Annual Existing House Price Change

Source: www.standardpoors.com, S and P Case-Schiller Housing Price Index.

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 KEYEVENTS

2) Increase in the default leading to the crisis

and foreclosure rates

Increasing sharply in Q3 2006 and reached 5.2% in Q3 2008

Default Rate

Source: mbaa.org, National Delinquency Survey.

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 KEYEVENTS
leading to the crisis

Foreclosure Rate
In Q3 2008, housing
prices were ±25%
below 2006 peak

Source: www.mbaa.org, National Delinquency Survey.

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 KEYEVENTS

3) Collapse of major investment banks leading to the crisis

and stock prices in 2008

Stock returns were down 37% in 2008 compared to previous year

S and P 500 Total Return

Source: www.standardpoors.com
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US Subprime Mortgage Crisis

MAJOR
CAUSES
Why it happened?
one.
The Housing Downturn
MAJORCAUSES
Why it happened?

• Excess supply of home inventory

• Sales volume of new homes dropped

two.
• Reduced market prices
• Increasing foreclosure rates

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

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 MAJORCAUSES
three.
Financial Institutions
Why it happened?

• Attraction from high returns

• Offered high-risk loan and incentives
• Believes they will pass on the risk to
others
four.
Securitization
• Mortgage-backed securities (MBS)
• Risk readily transferred to other
investors
• From 54% in 2001 to 75% in 2006
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 MAJORCAUSES
five.
Government & Regulators
Why it happened?

• Community Reinvestment Act, encourages

the development of the subprime debacle

six.
• Deregulation of Glass-Steagall Act
contributes to the subprime crisis
• The Fed’s manipulation of (low) interest
rates during 2002-2006
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 Fed’s rescue
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US Subprime Mortgage Crisis

IMPACT
Crisis Aftermath
Global Impact IMPACT
Crisis Aftermath
Investors will be very Consumer spending World economy may GDP growth will be
cautious to act will slowdown slip into recession low
• Lack confidence in • Lack of cash or • U.S. economy • Lose businesses
stock/bound unwilling to spend condition will affect • Lose jobs
market global economy • Economy slow
down

Exports will decrease

Unemployment rate
Financial market in China, Korea,
may be high
Taiwan
• May take long time • Slow economy • GDP growth heavily
to recover increase depends on export
unemployment rate

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Mortgage-based Securities IMPACT
Crisis Aftermath
in Indonesia
In Indonesia, MBS is also known as “Kontrak Total KPR Value
worth Rp 240 Trillion
Investasi Kolektif Efek Beragun Aset” (KIK-EBA) in 2013

The arrangement is done by “Otoritas Jasa Keuangan” through the

enactment of “OJK Regulation No. IX.K.1”
KIK-EBA in Indonesia:
Tahun Pokok
Nama EBA Penerbitan (Kelas A) Tingkat Bunga BI Rate

EBA-DBTN 01 2010 688.500 Juta 9,25% p.a. 6,25%

EBA-DBTN 02 2011 645.000 Juta 8,75% p.a. 6%

EBA-DBTN 03 2012 925.000 Juta 7,75% p.a. 5,75%

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Mortgage-based Securities IMPACT
Crisis Aftermath
in Indonesia

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 IMPACT
Mortgage-backed Securities Crisis Aftermath

Payment
Scheme
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 IMPACT
Risks of MBS in Indonesia Crisis Aftermath

+ Credit risks and loss related with the fall of property values

+ Geographical concentration of assets

+ Risks associated with the increase of interest rate

+ Liquidity risks of Mortgage-backed Securities

+ Legal Risks

+ Operational risks in the implementation of investment

manager’s activities, custodian bank, and service provider

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 THANK YOU!

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