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MORTGAGE LOANS

FIN 5333. MORTGAGE LOANS. AND. FINANCIAL CRISIS. THEERADEJ SUABTRIRAT ANH NGUYEN SUKIT THAOWAN. • Four Types of Mortgage Loans. • Mortgage Market Shares. • Default Rates. • The Circle of Housing Bust. OVERVIEW. Conforming mortgage.

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MORTGAGE LOANS

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  1. FIN 5333 MORTGAGE LOANS AND FINANCIAL CRISIS THEERADEJ SUABTRIRAT ANH NGUYEN SUKIT THAOWAN

  2. • Four Types of Mortgage Loans • Mortgage Market Shares • Default Rates • The Circle of Housing Bust OVERVIEW

  3. Conforming mortgage Jumbo mortgage • Private lenders • Higher interest rate • For buying a big, luxury house • Must meet Fannie Mae & Freddie Mac’s Guideline • Have four basic requirements Government-backed Mortgage Subprime mortgage • Considered government’s subprime • For FHA/VA Qualified Borrowers • For low-income borrowers to buy a small home • No Down Payment, long time to repay • Less desirable characteristic • Generally considered to have higher credit risk • Credit quality judged by the FICO credit score MORTGAGE MARKET

  4. After Housing Bust: Government mortgages dominated overall market Larger Conforming and Government-Backed Share Default in subprime mortgage shocked private lenders. Before Housing Boom: Small Subprime Share During Housing Boom: Private mortgages dominated overall market. Larger Subprime Share Borrowers with modest income and marginal credit could purchase home with minimal down payment MARKET SHARES

  5. After Housing Bust: Government mortgages dominated overall market Larger Conforming and Government-Backed Share Default in subprime mortgage shocked private lenders. Before Housing Boom: Small Subprime Share During Housing Boom: Private mortgages dominated overall market. Larger Subprime Share Borrowers with modest income and marginal credit could purchase home with minimal down payment MARKET SHARES

  6. After Housing Bust: Government mortgages dominated overall market Larger Conforming and Government-Backed Share Default in subprime mortgage shocked private lenders. Before Housing Boom: Small Subprime Share During Housing Boom: Private mortgages dominated overall market. Larger Subprime Share Borrowers with modest income and marginal credit could purchase home with minimal down payment MARKET SHARES

  7. After Housing Bust: Government mortgages dominated overall market Larger Conforming and Government-Backed Share Default in subprime mortgage shocked private lenders. Before Housing Boom: Small Subprime Share During Housing Boom: Private mortgages dominated overall market. Larger Subprime Share Borrowers with modest income and marginal credit could purchase home with minimal down payment MARKET SHARES

  8. After Housing Bust: Government mortgages dominated overall market Larger Conforming and Government-Backed Share Default in subprime mortgage shocked private lenders. Before Housing Boom: Small Subprime Share During Housing Boom: Private mortgages dominated overall market. Larger Subprime Share Borrowers with modest income and marginal credit could purchase home with minimal down payment MARKET SHARES

  9. Borrowers During Mid 2002 - Mid 2004 Fed Fund Rate and 1-Year ARM 2000-2007 Interest Rate (%) 1 They prefer ARM to FRM. ARM FRM Problematic Years 37% of Mortgage Markets is Subprime. 2 Year DEFAULT RATES Cause Linkage Result Linkage: Most ARM’s interest rate benchmark is closely tied to the Fed Fund rate since mid 2002- mid 2004

  10. The Circle of Housing Bust Mortgage Default Foreclosure & Housing Fire Sales So more Mortgage Default More Borrower in negative home equity House Price goes down CIRCLE OF HOUSING BUST

  11. ? QUESTION

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