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 Credit card Car loan
Other credit markets
Global Impacts of the Crisis
Investors will be very cautious to act
Lack confidence in stock/bound market Lack of cash or unwilling to spend U.S. economy condition will affect global economy Lose businesses Lose jobs Economy slow down
Consumer spending will slowdown
World economy may slip into recession
GDP growth will be low
Global Impacts of the Crisis
Financial market
May take long time to recover Slow economy increase unemployment rate GDP growth heavily depends on export
Unemployment rate may be high
Exports will decrease in China, Korea, Taiwan
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
1. 2.
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!