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Subprime Mortgages and the Financial Crisis

Subprime Mortgages and the Financial Crisis. Created by: Haley Muir. Subprime Mortgages. Mortgages offered to borrowers with a lower credit rating Usually below 600 Caused by making late bill payments or declaring bankruptcy Higher interest rates to compensate higher risk

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Subprime Mortgages and the Financial Crisis

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  1. Subprime Mortgages and the Financial Crisis Created by: Haley Muir

  2. Subprime Mortgages • Mortgages offered to borrowers with a lower credit rating • Usually below 600 • Caused by making late bill payments or declaring bankruptcy • Higher interest rates to compensate higher risk • Can be fixed or adjustable • Smarter financial decision to build up credit, and invest in conventional mortgage later

  3. Subprime Mortgages Cont. • Not intended as long-term financing • ‘Bridge’ loan to more permanent financing • Chance to build repayment history • Build equity in the house • Refinance into lower-priced mortgage • Borrowers who are unable to refinance have higher default rates

  4. Rise in Subprime Mortgages • Boom in housing • Standards for mortgages began to ease

  5. Residential Mortgage Backed Securities • Loans are purchased from issuing firms, and then assembled into pools that are sold to investors • Securitization of residential mortgages was dominated by Fannie Mae and Freddie Mac • Only extended loans to higher quality borrowers • Subprime market doesn’t meet requirements • Private label RMBSs

  6. Private Label RMBSs • Made their way into the portfolios of a wide range of investors • Exposed through other types of asset-backed securities • Ex. Collateralized debt obligations and packaged RMBSs • Level of risk not always clear, so institutions placed all trust into credit rating agencies • Structured investments rated highly

  7. The Financial Crisis • By the end of 2005 delinquency rates were much higher • Changes in house prices, employment conditions weaker, and standards for receiving credit lower • Little or no house-price appreciation • Riskiness of subprime lending revealed!

  8. Subprime Market Now? • Alive, and well! • As of 2009: • Large banks had backed out • Smaller lenders picked up business • Borrowers have fewer options, so they can increase interest • More difficult to get home & auto loans • Credit cards more expensive

  9. Subprime Market Now? Cont. • As of 2012: • Headed down the wrong path once again • Financial institutions trying to make up for the billions of dollars lost due to new regulations • Lending is a sign of the economy improving • Subprime borrowers has not extended to mortgage market—open to only the most creditworthy!

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