Transcript Real Estate (Dudes)

Mortgage Crisis
[Todd Snider]
• The crisis began with the bursting of the United States
housing bubble and high default rates on "subprime" and
adjustable rate mortgages (ARM), beginning in
approximately 2005–2006.
• Subprime lending is the practice of making loans to
borrowers who do not qualify for market interest rates
owing to various risk factors, such as income level, size
of the down payment made, credit history, and
employment status.
Supply and Demand
• Subprime borrowing was a major contributor to an
increase in home ownership rates and the demand for
housing. The overall U.S. home ownership rate
increased from 64% in 1994 (about where it was since
1980) to a peak in 2004 with an all-time high of 69.2%.
This demand helped fuel housing price increases and
consumer spending. Between 1997 and 2006,
American home prices increased by 124%.
• Overbuilding during the boom period eventually led to
a surplus inventory of homes, causing home prices to
decline, beginning in the summer of 2006. Easy credit,
combined with the assumption that housing prices
would continue to appreciate, had encouraged many
subprime borrowers to obtain adjustable-rate
mortgages they could not afford after the initial
incentive period.
Supply and Demand
External Pricing Influences
• Consumers where creating the External Forces
that led to these dramatic price increases. They
felt that anything they bought would increase in
value over time.
• This view kept them from actually realizing they
were paying too much already.
• Consumers perception of value was working
against them in the home market.
Why Have These Banks Failed???
• Securitization is a structured finance process in which
assets, receivables or financial instruments are acquired,
pooled together as collateral for the third party
investments( Investment banks). Alan Greenspan stated
that the securitization of home loans for people with poor
credit — not the loans themselves — was to blame for
the current global credit crisis.
• Financial institutions from around the world have
recognized subprime-related losses and write-downs
exceeding U.S. $501 billion as of August 2008. Profits at
the 8,533 U.S. banks insured by the FDIC declined from
$35.2 billion to $646 million (89%) during the fourth
quarter of 2007 versus the prior year, due to soaring loan
defaults and provisions for loan losses.
• BUNDLING was used to create the perception of value.
http://www.youtube.com/watch?v=0YNyn1XGyWg
SOLUTIONS
• Housing and Economic Recovery Act of 2008
• The Housing and Economic Recovery Act of
2008 included six separate major acts designed
to restore confidence in the domestic mortgage
industry. The Act included:
• Providing insurance for $300 billion in
mortgages estimated to assist 400,000
homeowners.
• Establishing a new regulator to ensure the safe
and sound operation of the GSEs (Fannie Mae
and Freddie Mac) and Federal Home Loan
banks.
• Raising the dollar limit of the mortgages the
government sponsored enterprises (GSEs) can
purchase.
• Providing loans for the refinancing of mortgages
to owner-occupants at risk of foreclosure. The
original lender or investor reduces the amount of
the original mortgage (typically taking a
significant loss) and the homeowner shares any
future appreciation with the Federal Housing
Administration. The new loans must be 30-year
fixed loans.
• Enhancements to mortgage disclosures.
• Community assistance to help local
governments buy and renovate foreclosed
properties
• President George W. Bush announced a plan to voluntarily and
temporarily freeze the mortgages of a limited number of
mortgage debtors holding ARMs. A refinancing facility called
FHA-Secure was also created. This action is part of an
ongoing collaborative effort between the US Government and
private industry to help some sub-prime borrowers called the
Hope Now Alliance.
• On 19 September 2008, the U.S. government announced a
plan to purchase large amounts of illiquid, risky mortgage
backed securities from financial institutions, which is estimated
to involve at minimum, $700 billion of additional commitments.
• On 1 October 2008 the U.S. Senate approved an amended
version of the plan, which was approved by the House on
October 3 and immediately signed into law by President Bush.
Greenspan, the former Chairman of the Federal
Reserve, stated:
"The current credit crisis will come to an end when the
overhang of inventories of newly built homes is
largely liquidated, and home price deflation comes to
an end. That will stabilize the now-uncertain value of
the home equity that acts as a buffer for all home
mortgages, but most importantly for those held as
collateral for residential mortgage-backed securities.
Very large losses will, no doubt, be taken as a
consequence of the crisis. But after a period of
protracted adjustment, the U.S. economy, and the
world economy more generally, will be able to get
back to business."
REAL ESTATE PRICING
[Brian Merriman]
Price
-Price Skimming
I-Phone (selling newness)
Real Estate (lots in a tract)
-Price Penetration
Providing a good or service below market price in the initial stages of the product
life cycle to attract consumers. After loyalty is established, price will rise to the
market price.
Contractors working with construction companies and price fluctuation.
Supply and Demand
-“Land flipping”
Supply and demand lead to an over abundance of land and major price decreases.
Break-even point
“Foreclosures”
-How foreclosures and short sales effect the current housing market.
-Until foreclosures cease and the over-supply of foreclosures are purchased, housing
market will remain down.
Possible Solutions
-SAM (Shared Appreciation Mortgage)
-Trickle-up plan
-Banks and interest rates