U.S. Subprime Mortgage Crisis
Presented to Professor Castillo-Ponce
Subprime Mortgage Crisis
Sharp rise in home foreclosures in late 2006 Only 9% in 1996, 13% in 1999, 20% in 2006 $1.3 Trillion subprime mortgage as of March 2007 The delinquency rate had risen to 21% by 2008
Finaaction from high returns Offered high-risk loan and incentives Believes that will pass on the risk to others
Securitization
Direct Impacts of the Crisis
Financial Institutions – Write-Downs
Citigroup (USA) - $24.1 bln Merrill Lynch (USA) - $22.5 bln UBS AG (Switzerland) - $16.7 bln Morgan Stanley (USA) - $10.3 Credit Agricole (France) - $4.8 bln HSBC (United Kingdom) - $3.4 bln Bank of America (USA) - $5.28 bln CIBC (Canada) – 3.2 bln Deutsche Bank (Germany) - $3.1 bln
Direct Impacts of the Crisis
Stock Market
08/15/07 Dow Jones had dropped below 13,000 from July’s 14000
First 3 weeks of 08, the Dow Jones Industrial Average fell 9%
Subprime Borrowers
For poor credit history Limited income
Subprime Lenders
Greater risks High returns
New Model of Mortgage Lending
Source: BBC News
Mortgage backed securities Risk readily transferred to other investors From 54% in 2001 to 75% in 2006
Causes of the Crisis
Government and Regulators
Financial Institutions – Bankruptcy
New Century Financial (USA)– Apr. 2, 2007 American Home Mortgage (USA) – Aug. 6, 2007 Sentinel management Group (USA) – Aug. 17, 2007 Ameriquest (USA) – Aug. 31, 2007 NetBank (USA) – Sept. 30, 2007 Terra Securities (Norway) – Nov. 28, 2007 American Freedom Mortgage Inc. (USA) – Jan. 30, 2007
Central banks
Less concerned with avoiding asset bubbles React after bubbles burst to minimize the impact No determination on monetary policy Institutions risk more because of Fed’s rescue
Causes of the Crisis
The Housing Downturn
Excess supply of home inventory Sales volume of new homes dropped Reduced market prices (10.4% 12/06-12/07) Increasing foreclosure rates
By 02/19/08 losses or write-downs > U.S. $150 bln Be expected exceeding $200 - $400 bln
Community Reinvestment Act, encourages the development of the subprime debacle
Glass-Steagall Act contributes to the subprime crisis (FDIC back up)
1/18/08 Dow Jones/0.5%, S&P 500/0.6%, and NASDAQ/0.3%
01/21/08 (black Monday) the world’s biggest falls since Sept. 11, 2001
Direct Impacts of the Crisis
Borrowers
Difficulties in re-financing Begin to default on loans Walk away from properties Fraudulent misrepresentations
Causes of the Crisis