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U.S. Subprime Mortgage Crisis

U.S. Subprime Mortgage Crisis. Presented to Professor Castillo-Ponce Presented by Qian Sun Man Ying Ha Econ 490 / Winter 2008. Subprime Mortgage Crisis. Sharp rise in home foreclosures in late 2006 Only 9% in 1996, 13% in 1999, 20% in 2006

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U.S. Subprime Mortgage Crisis

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  1. U.S. Subprime Mortgage Crisis Presented to Professor Castillo-Ponce Presented by Qian Sun Man Ying Ha Econ 490 / Winter 2008

  2. Subprime Mortgage Crisis • Sharp rise in home foreclosures in late 2006 • Only 9% in 1996, 13% in 1999, 20% in 2006 • $1.3 Trillion subprime mortgage as of March 2007 • The delinquency rate had risen to 21% by 2008 • Subprime Borrowers • For poor credit history • Limited income • Subprime Lenders • Greater risks • High returns

  3. New Model of Mortgage Lending Source: BBC News

  4. 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

  5. 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

  6. 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 Fed’s rescue

  7. Direct Impacts of the Crisis • Stock Market • 08/15/07 Dow Jones had dropped below 13,000 from July’s 14000 • First 3 weeks of 08, the Dow Jones Industrial Average fell 9% • 1/18/08 Dow Jones/0.5%, S&P 500/0.6%, and NASDAQ/0.3% • 01/21/08 (black Monday) the world’s biggest falls since Sept. 11, 2001

  8. Direct Impacts of the Crisis • Financial Institutions – Bankruptcy • New Century Financial (USA)– Apr. 2, 2007 • American Home Mortgage (USA) – Aug. 6, 2007 • Sentinel management Group (USA) – Aug. 17, 2007 • Ameriquest (USA) – Aug. 31, 2007 • NetBank (USA) – Sept. 30, 2007 • Terra Securities (Norway) – Nov. 28, 2007 • American Freedom Mortgage Inc. (USA) – Jan. 30, 2007

  9. 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

  10. Domestic Impacts of the Crisis • Home Owners • Housing prices down 10.4% in Dec. 07 vs. year-ago • Sales of new homes dropped by 26.4% in 07 vs. 06 • By Jan. 2008, 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

  11. 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 • Other credit markets • Credit card • Car loan

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

  13. Global Impacts of the Crisis • Financial market • May take long time to recover • Unemployment rate may be high • Slow economy increase unemployment rate • Exports will decrease in China, Korea, Taiwan • GDP growth heavily depends on export

  14. 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 ½ point • 10/31/07, ¼ point cut by Fed • 12/11/07, ¼ 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

  15. Forecasting • Two Different Opinions: • The crisis won’t affect global economy deeply • The crisis will lead the global economy to recession Alan Greenspan stated: ”The current credit crisis will come to an end when the overhang of inventories of newly built homes in largely liquidated, and home price deflation comes to an end . . . After a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.”

  16. Thank You!

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