Transcript US Subprime Credit Crisis

U.S. Subprime Mortgage Crisis
Presented to
Professor Castillo-Ponce
Presented by
Qian Sun
Man Ying Ha
Econ 490 / Winter 2008
Subprime Mortgage Crisis
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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
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Subprime Borrowers
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For poor credit history
Limited income
Subprime Lenders
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Greater risks
High returns
New Model of Mortgage Lending
Source: BBC News
Causes of the Crisis
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The Housing Downturn
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Excess supply of home inventory
Sales volume of new homes dropped
Reduced market prices (10.4% 12/06-12/07)
Increasing foreclosure rates
Borrowers
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Difficulties in re-financing
Begin to default on loans
Walk away from properties
Fraudulent misrepresentations
Causes of the Crisis
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Financial Institutions
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Attraction from high returns
Offered high-risk loan and incentives
Believes that will pass on the risk to others
Securitization
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Mortgage backed securities
Risk readily transferred to other investors
From 54% in 2001 to 75% in 2006
Causes of the Crisis
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Government and Regulators
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Community Reinvestment Act, encourages the
development of the subprime debacle
Glass-Steagall Act contributes to the subprime crisis
(FDIC back up)
Central banks
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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
Direct Impacts of the Crisis
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Stock Market
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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%
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
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Financial Institutions – Bankruptcy
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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
Direct Impacts of the Crisis
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Financial Institutions – Write-Downs
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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
By 02/19/08 losses or write-downs > U.S. $150 bln
Be expected exceeding $200 - $400 bln
Domestic Impacts of the Crisis
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Home Owners
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Housing prices down 10.4% in Dec. 07 vs. year-ago
Sales of new homes dropped by 26.4% in 07 vs. 06
By Jan. 2008, the inventory of unsold new homes
stood at 9.8 months, the highest level since 1981.
Two million families will be evicted from their homes
Minorities
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Disproportionate level of foreclosures in minority
46% Hispanics, 55% blacks got higher cost loans
Domestic Impacts of the Crisis
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Economy Condition
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Recession
Low GDP growth rate
Business close out or lose money (banks, builders etc.)
Weak financial market
Low consumer spending
Lose jobs
Other credit markets
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Credit card
Car loan
Global Impacts of the Crisis
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Investors will be very cautious to act
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Consumer spending will slowdown
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Lack of cash or unwilling to spend
World economy may slip into recession
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Lack confidence in stock/bound market
U.S. economy condition will affect global economy
GDP growth will be low
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Lose businesses
Lose jobs
Economy slow down
Global Impacts of the Crisis
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Financial market
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Unemployment rate may be high
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May take long time to recover
Slow economy increase unemployment rate
Exports will decrease in China, Korea, Taiwan
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GDP growth heavily depends on export
Government and Central Banks’ Actions
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08/2007, President Bush announced – Hope New Alliance
02/13/08, President signed a tax rebates of $168 bln
09/18/07, the Fed dropped rate ½ point
10/31/07, ¼ point cut by Fed
12/11/07, ¼ point cut by Fed
01/22/08 the Fed slashed the rate by 3/4 points to 3.5%
01/30/08 another cut of 1/2 points to 3%
Central Banks have pumped billions of dollars to banks
Central Banks of the world have done the same thing
Forecasting
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Two Different Opinions:
The crisis won’t affect global economy deeply
The crisis will lead the global economy to recession
Alan Greenspan stated: ”The current credit crisis will
come to an end when the overhang of inventories of
newly built homes in largely liquidated, and home price
deflation comes to an end . . . After a period of
protracted adjustment, the U.S. economy, and the world
economy more generally, will be able to get back to
business.”
Thank You!