A Survey Paper on 2007 Subprime Mortgage Financial Crisis

A Survey Paper on 2007 Subprime Mortgage Financial Crisis Lan Li Edward P. Fitts Department of Industrial and Systems Engineering Outline  Background Introduction  Causes of the Subprime mortgage crisis  The countrywide influence and the corresponding reactions  The international impacts of this financial crisis Part I—Background Introduction  What is Subprime lending? the practice of making loans to borrowers who do not qualify for the best market interest rate because of their deficient credit history or inability to prove they could for the loans they are applying.  Subprime loan involves high risks. --housing market --a combination of high interest rates, bad credit history and murky financial situations associated with the applicants. Part II—Causes of the Crisis  Many factors created the crisis, but the most immediate causes were a rising interest rate environment which caused people with adjustable rate mortgages (ARM) to see significant increases in their mortgage payments, and declining property values as the national real estate market finally began making corrections (Housing bubble bursts).  Flow chart. Part II—Cont.  Role of Mortgage lenders --Incomplete lending procedure. For example, Many of the sub-prime loans did not even require that borrowers document the income listed on their loan application with a pay stub. some of the lending probably involved actual fraudulence where people misstated their income and qualifications. --adjustable-rate mortgages (ARM); interest-only adjustable-rate mortgages Part II—Cont.  Role of Subprime borrowers—homeowners --With the assumption that housing prices would continue to increase, many subprime borrowers are encouraged to obtain ARM. --Difficult to refinance due to declining property values.  Role of Regulators --In response to a concern that lending environment was too easy or say, not properly regulated, the House and Senate are both considering making some new bills to regulate lending practices. Part III- The countrywide influence and the corresponding reactions  Drastic fluctuation in stock market--investors began to worry about whether the Subprime crisis will turn into a global economic one.  Many investment banks, mortgage lenders, real estate investment trusts and hedge funds suffered significant losses as a result of mortgage payment defaults or mortgage asset devaluation. --New Century Finance; American Home Mortgage --Merrill Lynch;Citigroup Part III—cont.  The recession of housing market and the continually increased oil prices will slow down the step of economic growth rate of the U.S.  Actions to manage the crisis. --Central bank infuse funds to ensure member banks have access to funds to live through this difficult time. --Lower interest rate for short-term loans for several times. --Make new regulations. Part IV-- The international impacts of this financial crisis  As closely connected with the United States financial markets, the euro zones and Japan are experiencing a rough time as well.  Pink-Euro Yellow-Japan Blue-U.S. (Till 31th. Aug, 2007) Part IV- Cont.  Main impact to China --export markets shrinks --import-rely country --shrinking profits of many Chinese manufactures and foreign trade enterprises Thank you!