Slide 1Agenda (interruptions welcome)MortgagesSubprime Loans - BasicsSubprime Loans - BasicsSubprime Loans - BasicsSubprime Loans - BasicsSubprime Loans - HistoryThe Subprime CrisisThe Subprime CrisisThe Subprime CrisisThe Subprime CrisisThe Crisis – broader effectThe Crisis – broader effectThe Subprime CrisisMain SourcesBA 572 presents:The Subprime Mortgage Lending Marketby Ofer HeymanMay 11, 2011Agenda (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 ConclusionMortgages•Risk free? / Poor investment?Investor view point!•Securities (g)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…/DSubprime Loans - BasicsSubprime Loans - BasicsSubprime Loans - Basics•Size proportion (g)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 crashThe Subprime CrisisThe Subprime CrisisThe Subprime CrisisThe Subprime CrisisThe Crisis – broader effectThe Crisis – broader effectThe 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 classicMain 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):
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