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BA 572 presents: The Subprime Mortgage Lending Market

BA 572 presents: The Subprime Mortgage Lending Market. by Ofer Heyman May 11, 2011. Agenda (interruptions welcome). Understand it! Mortgage and MBS context What is subprime loan? Criteria / Grading History The 2007 Subprime Meltdown Introduction Personal perspective By the numbers

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BA 572 presents: The Subprime Mortgage Lending Market

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  1. BA 572 presents:The Subprime Mortgage Lending Market by Ofer Heyman May 11, 2011

  2. Agenda (interruptions welcome) • Understand it! • Mortgage and MBS context • What is subprime loan? • Criteria / Grading • History • The 2007 Subprime Meltdown • Introduction • Personal perspective • By the numbers • Broader effects • Myths and Conclusion

  3. Mortgages • Risk free? / Poor investment? • Investor view point! • Securities (g)

  4. Subprime Loans - Basics • What is it? • Lower than prime rate? Bad people? • Discretization (bb) • Major Criteria for Grade A • FICO > 660 • PTI < 0.28 / 0.36 (bb) • LTV < 0.95 (bb) • Varies in practice • A-/B…/D

  5. Subprime Loans - Basics

  6. Subprime Loans - Basics

  7. Subprime Loans - Basics • Size proportion (g)

  8. Subprime Loans - History • Milestones leading to the 2007 crisis • 1980: Allowing high rates (DIDMCA) • 1982: Permitting variable rates and balloons (AMTPA) • 1986: Tax Reform Act - prohibited other deductions • 1995: MBS with subprime-loan collateral more attractive • Late 1990s : rapid growth of highest risk • Also, dropped rates  cash out • 2000-2005: rapid growth in volume, mainly lower risk • 2005-2006: The bubble grows • 2006-2007: Bubble bursts, increased rates  defaults • 2007-2008: MBS crash

  9. The Subprime Crisis

  10. The Subprime Crisis

  11. The Subprime Crisis

  12. The Subprime Crisis

  13. The Crisis – broader effect

  14. The Crisis – broader effect

  15. The Subprime Crisis • Myths • Subprime went only to impaired borrowers • Subprime promoted home ownership • Decline in home value CAUSED the crisis • Subprime mortgages failed because of rate resets • Crisis was unexpected • Subprime market was too small to cause big troubles  • Complex system • Boom-Bust classic

  16. Main Sources • Videos • http://www.youtube.com/watch?v=HSjEyOp2dEM&feature=related • http://www.youtube.com/watch?v=q8hjUei-Nwo • Papers and Web Sites • Ten Myths about Subprime Mortgages (May 9, 2009): http://www.clevelandfed.org/research/commentary/2009/0509.pdf • A Snapshot of Mortgage Conditions with an Emphasis on Subprime Mortgage Performance (August 27, 2008): http://www.federalreserveonline.org/pdf/mf_knowledge_snapshot-082708.pdf • Wikipedia: http://en.wikipedia.org/wiki/Subprime_mortgage_crisis • The Evolution of the Subprime Mortgage Market (Feb 2006): http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf

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