CL Big Room PPT Template by niusheng11

VIEWS: 12 PAGES: 25

									The History of the 2006-? Economic
Crisis
Three Parts: 1) Government Intervention; 2) Federal Reserve
Policies; and 3) Corruption
Timeline

1938 Fannie Mae as government agency
1967: LBJ spins the Fannie off as GSE
1970: Freddie Mac created
1977: CRA enacted –
1992: Congress pushes FF to provide low income loans
1995: CRA strengthened
1996: HUD required that 12% of all mortgages purchased by FF be
special affordable loans -- income less than 60% of the median in the
area – then 20% in 2000, 22% in 2005 and 28% in 2008. HUD also
gives FF target for affordable loans of over 50%.


2
FF with implicit govt guarantee can
offer product at lower prices: gap
between AAA and 10 yr Treasury
1.46% whereas between FF and 10
yr Treasury .5%




3
Given Fannie/Freddie are “as good
as US Govt,” can attract funds from
around the world.




4
Fannie/Freddie dominate housing
market – over 80% of all mtg




5
Looser Standards

In the 1980s, groups such as the activists at ACORN began pushing
charges of "redlining" - claims that banks discriminated against minorities
in mortgage lending.
In 1989, Congress amended the Home Mortgage Disclosure Act to force
banks to collect racial data on mortgage applicants.




6
Looser Standards

Larger percentage of NINJA
loans included in securities   A 1995 strengthening of the
                               Community Reinvestment Act
                               required banks to find ways to
                               provide mortgages to their
                               poorer communities.
                               The Boston Fed ruled that
                               participation in a credit-
                               counseling program should be
                               taken as evidence of an
                               applicant's ability to manage
                               debt.




7
Securitization

1. A borrower – sometimes working with a broker, gets a loan from a
lender.




8
Securitization

2. The lender bundles a number of home loans and sells bundle to an
investment bank.
                                    Security A




9
Securitization

3. The investment bank takes pools of home loans worth billions of
dollars and places them in a trust. The trust issues bonds secured by the
mortgages.




10
Securitization

4. The investment bank divides the loans into bond risk groups -
“tranches”. Rating groups indicate the risk.


                                                 Medium Risk




                                                  Low Risk




                                                  High Risk


11
Securitization

5. Bonds are sold to bigger investors.
6. Potential risk of default is solved by credit default swap.




12
Part 2: Fed Policies




13
In response to 2002
stock market
collapse, Fed Funds
is lowered.




14
     Subtracting the averaged trailing 12 months median CPI (SOURCE:
      Cleveland Fed) from the average of the monthly Fed Funds rate
                        (SOURCE: Federal Reserve).




15
Mortgage rates fell.




16
     US Housing Bubble




17
     Fed funds rate versus Case Shiller home price index: (Robert Murphy,
                                 Mises.org)




18
Root Cause

The bubble is a combination of “affordable housing” and the Fed's
boom-bust policies.
The NINJA loans meant that the investors looking for homes to buy and
resell got no down, interest only, ARMS also. It was not just poor people.




19
Is it due to lax regulation? Were regulators sleeping?




 NO - regulators relaxed lending standards, at the behest of community
 groups and "progressive" political forces.

20
Securitization

4. The investment bank divides the loans into bond risk groups -
“tranches”. Rating groups indicate the risk.


                                                 Medium Risk



AAA                                               Low Risk




                                                  High Risk


21
The Crunch
Federal funds rate was kept at 2 percent or lower from November 2001
right through to the end of 2004.

Greenspan used the housing market to prop up the economy after the
9/11 attacks.


In 2002 he called mortgage markets a "powerful stabilizing force"
because they allowed people to extract equity from their homes.


In 2004 he said that homeowners should consider using adjustable-rate
mortgages to save on interest and prepayment costs.


In 2005 Fed Funds rate increased tremendously– from less than 2% to
more than 5%
22
When Fed pops bubble, FF
has to write off bad debt.




 23
Much of the Bad Debt had
been securitized.




 24
Ohhhh Nooooo – Credit Crunch




25

								
To top