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Subprime Mortgage Lending Market

Subprime Mortgage Lending Market. Road Map. What Is Subprime? A Brief History How Does the Subprime Market Work? How Does The Subprime Market Differ From the Prime Market? Why Subprime Mortgages? Subprime Crisis. What Is Subprime?. Prime: Ideal Candidates; Lowest Rate

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Subprime Mortgage Lending Market

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  1. Subprime Mortgage Lending Market

  2. Road Map • What Is Subprime? • A Brief History • How Does the Subprime Market Work? • How Does The Subprime Market Differ From the Prime Market? • Why Subprime Mortgages? • Subprime Crisis

  3. What Is Subprime? • Prime: Ideal Candidates; Lowest Rate • Subprime: Less than Ideal • Limited debt experience • No possession of assets for Collateral • Excessive debt • History of late or missed payments • Defaulting on Debt • Bankruptcy

  4. History -DIDMCA • Depository Institutions Deregulation and Monetary Control Act (DIDMCA) • 1980 • Deregulated fees and interest rates

  5. History -AMTPA • The Alternative Mortgage Transaction Parity Act (AMTPA) • 1982 • Variable Interest Rates and Balloon Payments

  6. History -TRA • Tax Reform Act • 1986 • Increased the demand for mortgage debt • Prohibited the deduction of interest on consumer loans • Allowed interest deductions on mortgages (This made even high-cost mortgage debt cheaper than consumer debt for many homeowners)

  7. Proceeds for new loan Subprime Borrower Subprime Lender Mortgage Backed Securities Investment Bank

  8. Cautions of Subprime • Predatory Lending • High Rates • Hidden costs • Adjustable/variable rates • Over-value Home • Potentially Discriminatory

  9. Protecting the Lender • Not Strictly Predatory • High Risk borrowers • Transfer/Mitigate Risk • Higher Returns

  10. Subprime Differs From Prime • Higher Upfront Costs: • Application fees • Appraisal fees • Higher Continuing Costs: • Mortgage Insurance Payments • Principle and Interest Payments • Late Fees and Fines

  11. Subprime Market • Higher risk –six times as likely to default • Subprime ARMs were only 6.8% of USA mortgages in 2007, but accounted for 43% of the foreclosures

  12. Why Subprime • Borrower: • They want to Buy Stuff • Lender: • Higher Returns • Able to break into the market • 3rd party: some economists; the government. • Homeownership is considered good. • Boom In building market

  13. Subprime Crisis • Prime and Subprime mixed • 2006 housing bust • Adjustable Rate Mortgages -80% • Record defaults -underwater • Lost investor confidence in ‘safe’ loans

  14. Questions?

  15. Sources • http://en.wikipedia.org/wiki/Subprime_mortgage_crisisInvestopedia • ‘The Evolution of the Subprime Mortgage Market’ Federal Reserve Bank of St. Louis Review: Jan/Feb 2006 • http://www.washingtonpost.com/wp-dyn/content/graphic/2007/03/14/GR2007031400174.html • http://en.wikipedia.org/wiki/Subprime_lending

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