Mortgage Crisis [Todd Snider]

1. Mortgage Crisis[Todd Snider] • The crisis began with the bursting of the United States housing bubble and high default rates on "subprime" and adjustable rate mortgages (ARM), beginning in approximately 2005–2006. • Subprime lending is the practice of making loans to borrowers who do not qualify for market interest rates owing to various risk factors, such as income level, size of the down payment made, credit history, and employment status.

2. Supply and Demand • Subprime borrowing was a major contributor to an increase in home ownership rates and the demand for housing. The overall U.S. home ownership rate increased from 64% in 1994 (about where it was since 1980) to a peak in 2004 with an all-time high of 69.2%. This demand helped fuel housing price increases and consumer spending. Between 1997 and 2006, American home prices increased by 124%. • Overbuilding during the boom period eventually led to a surplus inventory of homes, causing home prices to decline, beginning in the summer of 2006. Easy credit, combined with the assumption that housing prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages they could not afford after the initial incentive period.

3. Supply and Demand

4. External Pricing Influences • Consumers where creating the External Forces that led to these dramatic price increases. They felt that anything they bought would increase in value over time. • This view kept them from actually realizing they were paying too much already. • Consumers perception of value was working against them in the home market.

5. Why Have These Banks Failed??? • Securitization is a structured finance process in which assets, receivables or financial instruments are acquired, pooled together as collateral for the third party investments( Investment banks). Alan Greenspan stated that the securitization of home loans for people with poor credit — not the loans themselves — was to blame for the current global credit crisis. • Financial institutions from around the world have recognized subprime-related losses and write-downs exceeding U.S. $501 billion as of August 2008. Profits at the 8,533 U.S. banks insured by the FDIC declined from $35.2 billion to $646 million (89%) during the fourth quarter of 2007 versus the prior year, due to soaring loan defaults and provisions for loan losses. • BUNDLING was used to create the perception of value.

7. http://www.youtube.com/watch?v=0YNyn1XGyWg SOLUTIONS • Housing and Economic Recovery Act of 2008 • The Housing and Economic Recovery Act of 2008 included six separate major acts designed to restore confidence in the domestic mortgage industry. The Act included: • Providing insurance for $300 billion in mortgages estimated to assist 400,000 homeowners. • Establishing a new regulator to ensure the safe and sound operation of the GSEs (Fannie Mae and Freddie Mac) and Federal Home Loan banks.

8. Raising the dollar limit of the mortgages the government sponsored enterprises (GSEs) can purchase. • Providing loans for the refinancing of mortgages to owner-occupants at risk of foreclosure. The original lender or investor reduces the amount of the original mortgage (typically taking a significant loss) and the homeowner shares any future appreciation with the Federal Housing Administration. The new loans must be 30-year fixed loans. • Enhancements to mortgage disclosures. • Community assistance to help local governments buy and renovate foreclosed properties

9. President George W. Bush announced a plan to voluntarily and temporarily freeze the mortgages of a limited number of mortgage debtors holding ARMs. A refinancing facility called FHA-Secure was also created. This action is part of an ongoing collaborative effort between the US Government and private industry to help some sub-prime borrowers called the Hope Now Alliance. • On 19 September 2008, the U.S. government announced a plan to purchase large amounts of illiquid, risky mortgage backed securities from financial institutions, which is estimated to involve at minimum, $700 billion of additional commitments. • On 1 October 2008 the U.S. Senate approved an amended version of the plan, which was approved by the House on October 3 and immediately signed into law by President Bush.

10. Greenspan, the former Chairman of the Federal Reserve, stated: "The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business."

11. REAL ESTATE PRICING [Brian Merriman] Price -Price Skimming I-Phone (selling newness) Real Estate (lots in a tract) -Price Penetration Providing a good or service below market price in the initial stages of the product life cycle to attract consumers. After loyalty is established, price will rise to the market price. Contractors working with construction companies and price fluctuation. Supply and Demand -“Land flipping” Supply and demand lead to an over abundance of land and major price decreases. Break-even point “Foreclosures” -How foreclosures and short sales effect the current housing market. -Until foreclosures cease and the over-supply of foreclosures are purchased, housing market will remain down. Possible Solutions -SAM (Shared Appreciation Mortgage) -Trickle-up plan -Banks and interest rates