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Understanding the Subprime Crisis A complete explanation The roles of different participants
Securitization
What is securitization? The Wall Street quotation: As long as an asset can create stable cash flows, then it can be securitized.
Mortgage Brokers
Adjustable-rate mortgages (ARM) “Teaser rates” Forgeries of documents Increased subprime mortgages
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Understanding the Subprime Crisis A complete explanation The roles of different participants
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Understanding the Subprime Crisis A complete explanation The roles of different participants
Mortgage Lenders
Revenues from mortgages Qualification guidelines loose Increase of subprime mortgages
Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security with specific risk-return characteristics.
Understanding the Subprime Crisis A complete explanation The roles of different participants
Home Buyers
Borrowers Without steady jobs Weaker credit histories
Outline
1 How different mortgage loan markets work Traditional mortgage loan market Modern mortgage loan market
2 A complete explanation of the subprime crisis The roles of different participants Transmission mechanism
Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security with specific risk-return characteristics.
Understanding the Subprime Crisis
Yu Gao
Department of World Economy School of Economics Fudan University
UNIVE N
1905
FUDA
RSITY
Understanding the Subprime Crisis
1994: $35 billion (5% of total originations) 1996: $160 billion (13%) 2006: $600 billion (20%) Disadvantages & Motivations
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Understanding the Subprime Crisis A complete explanation The roles of different participants
Large Mortgage Loan Corporations
Large private companies: e.g., New Century Financial GSEs: Government Sponsored Enterprises
Frannie Mae and Freddie Mac Approved by the Congress Buy mortgage loans from other agencies Risk shiห้องสมุดไป่ตู้ting by securitization
MBS
What is MBS? A mortgage-backed security (MBS) is an asset-
backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.
Mortgage Brokers
Adjustable-rate mortgages (ARM) “Teaser rates” Forgeries of documents Increased subprime mortgages
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Understanding the Subprime Crisis A complete explanation The roles of different participants
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Understanding the Subprime Crisis A complete explanation The roles of different participants
MBS
What is MBS? A mortgage-backed security (MBS) is an asset-
Subprime mortgage loans Little down payment Higher interest rates
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Understanding the Subprime Crisis A complete explanation The roles of different participants
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Understanding the Subprime Crisis A complete explanation The roles of different participants
A Typical Arrangement of Securitization
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Understanding the Subprime Crisis A complete explanation The roles of different participants
Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security with specific risk-return characteristics.
Mortgage Lenders
Revenues from mortgages Qualification guidelines loose Increase of subprime mortgages
1994: $35 billion (5% of total originations) 1996: $160 billion (13%) 2006: $600 billion (20%) Disadvantages & Motivations
3 Comments and Conclusions 4 Q&A
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Understanding the Subprime Crisis Different mortgage loan markets Traditional market
A Look into Residential Mortgage Market
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Understanding the Subprime Crisis A complete explanation The roles of different participants
Securitization
What is securitization? The Wall Street quotation: As long as an asset can create stable cash flows, then it can be securitized.
In China
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Understanding the Subprime Crisis Different mortgage loan markets Modern market
A Look into Residential Mortgage Market
In the U.S.
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Understanding the Subprime Crisis A complete explanation The roles of different participants
Securitization
What is securitization? The Wall Street quotation: As long as an asset can create stable cash flows, then it can be securitized.