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Britney Melcher Greg Russo Lyndsey Robison Shawn Stormer Began in 2007 Most severe of post- WWII era Impacts on: - The housing market - Financial Institutions worldwide - general economy Result? - deep global recession Housing Bubble: characterized by rapid increases in value of real estate. Housing prices peaked in 2005 and started to decrease in 2006. Increased foreclosure rates in 2006-2007 led to a major crisis in: subprime, Alt-A, mortgage, credit, hedge fund, and other financial institutions on a global scale. In 2005-2006, about 1/3 of the mortgage loans were for adjustable-rate mortgages (ARM) Borrowers extended mortgages that they could not pay in the long run. They were given loans with the expectation that accumulating home equity would allow refinancing into better mortgages. Goals: -meet federal (HUD) goals - improve home ownership of low and middle income families Lending practices by Fannie Mae and Freddie Mac shoehorned millions of people into homes that they could not afford. They are now owned by federal government. Between 1997 and 2006 ◦ Typical American house price increased 124% ◦ In 2006 prices began too decline, and still have not hit rock bottom ◦ In December 2008, the Case-Shiller Home Price Index reported its largest price drop in history. 2001- National median home price ranged from 2.9 to 3.1 times the median household income 2004- Rose to 4.0 2006- Rose to 4.6 1990-1995- Average 609,000 newly constructed homes per year 2005- 1,283,000 newly constructed single family homes sold 2005- Homeowners extracted $750 Billion of equity from their homes ◦ Up from $106 Billion in 1996 ◦ Spent 2/3 of it on personal consumption 2008- $900 Billion special loans and rescues ◦ Over half Fannie Mae Freddie Mac Federal Housing Network December 24, 2009- Treasury Department ◦ Provide Fannie Mae and Freddie Mac unlimited financial support for 3 years Subprime lending refers to credit quality of borrowers with weakened credit histories ◦ March 2007- Value of subprime mortgages was $1.3 Trillion ◦ Over $7.5 Million first-lien subprime mortgages outstanding Form of security interest granted Created in 1937 under the FDR administration Current mission is to increase homeownership, support community development and increase access to affordable housing free from discrimination. Fannie Mae & Freddie Mac ◦ 1996, HUD set target for 42% of mortgages to be issued to borrowers whose income was below the median of the area. ◦ 2000, this number was raised to 50% GSE’s (group of financial service corporations) receive tax incentives when purchasing from low income borrowers. Subprime Mortgages – mortgage offered to borrowers with a greater-thanaverage risk of defaulting on the loan Established in 1977 but strengthened in 1995 ◦ Increased number of loans given to low and moderate income families by 80% Why? ◦ Pressure caused banks to serve poor regions of the US ◦ Resulted in politicians pushing for increased home ownership & urban development without committing budgetary dollars. $300 billion government initiative to refinance troubled mortgages and boosts oversight of Fannie Mae & Freddie Mac Also provide government-backed mortgages and get out from under risky mortgages distressed homeowners can’t afford Tax breaks for home buying 1st national licensing system for mortgage brokers & loan officers Program that allows US Treasury to purchase or insure $24 trillion of troubled assets ◦ Illiquid difficult to value assets (foreclosed homes) from banks & other financial institutions Once housing stabilizes value is expected to increase and both the banks and Treasury are expected to profit Encourage lending levels seen before crisis Stabilize housing market by providing help to 7-9 million Americans by reducing monthly mortgage payments 4-5 million with loans from Fannie Mae & Freddie Mac opportunity to refinance $75 billion to 3-4 million Americans for aid to preventing more foreclosures Detailed info about each program Also self-assessment & calculators to determine if an individual is eligible Ability to connect with free counseling resources for questions Locate local homeowner events Checklist of materials to have when contacting about this program FAQ from similar borrowers •Housing crisis moved beyond USA •Canada •England •Spain •Ireland •Australia Household debt is historically high Obligatory Mortgage Insurance ◦ Insurance required for <20% down payment Single-family housing sales increased ◦ 78% over 2009 ◦ Due to fear of increase in interest rates Houses estimated to be overvalued by 30% Loaned money to risky investors ◦ Reacted to crisis in US by increasing interest rates Housing prices have increased 300% since 1975 Housing prices more than tripled since 1997 Debt increasing 25% each year ◦ Interest rates are variable from year to year Banking system well equipped ◦ Conservative laws Require high securities from potential borrowers ◦ Helped in the UK Banking Bailout Increase in prosperity in the 90’s ◦ Caused many Irish citizens to move back to Ireland ◦ Further increased housing prices Central Bank of Ireland ◦ Admitted houses overvalued by 60% (2005) Liam Carrol, developer ◦ Unable to pay back loans 1.3 billion euros Debt to GDP ratio increased from 80% to 160% since 1994 ◦ Inflation only rose 36% Houses are overvalued by 18% Government Oversight ◦ Regulate who loans can be given too Focus on Economy ◦ Restoring jobs will increase demand in the housing market Reward Smart Investing Bring prices back down to equilibrium ◦ Construction/Sale Prices Restore Investor Faith Conservative Banking Laws