US Subprime Credit Crisis

Document Sample
US Subprime Credit Crisis Powered By Docstoc
					U.S. Subprime Mortgage Crisis
          Presented to
     Professor Castillo-Ponce
             Presented by
               Qian Sun
             Man Ying Ha

        Econ 490 / Winter 2008
        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

   Subprime Borrowers
       For poor credit history
       Limited income

   Subprime Lenders
       Greater risks
       High returns
New Model of Mortgage Lending




Source: BBC News
            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

   Borrowers
       Difficulties in re-financing
       Begin to default on loans
       Walk away from properties
       Fraudulent misrepresentations
             Causes of the Crisis
   Financial Institutions
       Attraction from high returns
       Offered high-risk loan and incentives
       Believes that will pass on the risk to others


   Securitization
       Mortgage backed securities
       Risk readily transferred to other investors
       From 54% in 2001 to 75% in 2006
             Causes of the Crisis
   Government and Regulators
       Community Reinvestment Act, encourages the
        development of the subprime debacle
       Glass-Steagall Act contributes to the subprime crisis
        (FDIC back up)


   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
        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%
        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
   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
        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

    By 02/19/08 losses or write-downs > U.S. $150 bln
    Be expected exceeding $200 - $400 bln
    Domestic Impacts of the Crisis
    Home Owners
        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
        Disproportionate level of foreclosures in minority
        46% Hispanics, 55% blacks got higher cost loans
Domestic Impacts of the Crisis
   Economy Condition
       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
       Credit card
       Car loan
Global Impacts of the Crisis
   Investors will be very cautious to act
       Lack confidence in stock/bound market
   Consumer spending will slowdown
       Lack of cash or unwilling to spend
   World economy may slip into recession
       U.S. economy condition will affect global economy
   GDP growth will be low
       Lose businesses
       Lose jobs
       Economy slow down
Global Impacts of the Crisis
   Financial market
       May take long time to recover
   Unemployment rate may be high
       Slow economy increase unemployment rate
   Exports will decrease in China, Korea, Taiwan
       GDP growth heavily depends on export
Government and Central Banks’ Actions

   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
    Two Different Opinions:
1.   The crisis won’t affect global economy deeply
2.   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!

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:4
posted:5/18/2012
language:
pages:16
fanzhongqing fanzhongqing http://
About