In the early to mid 2000s a housing bubble was created due to easy access to credit. The fall-out once investment bubble popped nearly brought the banking sector to its knees This short presentation (part of a series on bubbles) explained what happened

1. BUBBLE SPOTTING SERIES - 2014
QUICK SUMMARY FORMAT

2. This short presentation on the Housing Bubble / Subprime crisis
forms part of a larger series of presentations on Market Bubbles
Front page graphic - www.dailyfresher.com

3. BACKGROUND
American Economic growth started
deteriorating in the 2000’s, and was
further negatively impacted by the
after-effects of the Sept 2001 attacks.
In an attempt to stimulate the
economy, the Federal Reserve lowered
interest rates down from 6.5% to 1%
(the lowest rate in 45 years) BY 2003.
www.buildingscheme.com

4. In 2002 the US Government launched
an initiative to increase home
ownership under Minority groups by
way of TAX CREDITS, SUBSIDIES and a $
440 BILLION COMMITMENT.
SUBSEQUENTLY INCENTIVES WERE
ADDED.
www.buildingscheme.com

5. Through Fannie May and Freddie Mac
(its government sponsored
enterprises), credit standards
deteriorated from 2004 onwards,
resulting in many more loans being
given to higher-risk borrowers, or
individuals who would not have been
considered credit worthy in
accordance with traditional standards
(this was the so-called SUB-PRIME
sector).

6. Net Capital rules were also suspended
for some banks.

7. Financial role players, such as banks,
repackaged these loans, mixing and
combining good quality loans with subprime loans, which were then sold off
(securitisation) as financial products
(mortgage-backed securities) to
investors (Banks, Pension funds,
Schools, International Corporate
investors etc.).

8. These investment products were
complex, had different payment
tranches and different rights
depending which type of investment an
investor bought into. In all probability
very few investors fully understood
what they were buying into.

9. Due to cheap finance, and deteriorating
credit standards, many individuals now
took out relatively cheap adjustable
rate mortgages which they otherwise
would not have been able to afford.

10. Between 2000-2006 national housing
prices increased ± 9 % PA — and in
excess of 20% in some overheated
regions. Some home owners refinanced
and took 2nd bonds up to the revised
property value, cashing in on the
difference.

11. www.milkeninstitute.org/pdf/riseandfallexcerpt.pdf

12. Many of these loans were on
predatory terms.

13. Sub-prime home mortgage originations
increased dramatically, from 8%
(2001) to 21 % (2005). by 2006, 80% of
these subprime loans were repackaged
into and sold off to investors as
mortgage backed securities.

14. All kinds of new financial products
were developed during this period.
Furthermore many banks simply took
on too many bad loans.

15. New loans issued increased from $500
billion in 1990 to $2.4 trillion IN 2007.

16. From 2005, interest rates increased.
Due to speculation, housing inventory
increased, which resulted in a price
reduction.

17. Due to decreasing prices, numerous
mortgaged Homes were now worth
less than the outstanding debt on
these properties.

18. Many (sub-prime) owners were unable
to refinance the balance, and the
house was repossessed. In some
states, home owners simply walked
away.

19. Final Report of the National Commission on the Causes of
the Financial and Economic Crisis in the United States

20. This lead to an excess of available
property inventory, further dropping
the price.

21. At the same time, due to reduced
repayments being received, many
banks’ already compromised capital
levels were being depleted.

22. Business Insider.com

23. In early 2007, 25 sub-prime lenders
declared bankruptcy, announced
substantial losses, or put themselves
up for sale.

24. In late 2008, both Fannie Mae
and Freddy Mac reported
insolvency.

25. The US Treasury bailed out certain
banks, but not others. Interest rates
were lowered again.

26. A Fiscal stimulus package (and toxic
asset relief program- TARP) was put in
place. Regulations were amended, Acts
passed, Home Owner assistance
implemented.

27. A World wide credit crunch starts
kicking in as many international banks
one after the other discover that
their investment portfolios had
subprime exposure.

28. * (Pledges vs
actual expenditure
estimates still
differ hugely).

30. the Housing Bubble and Debt Crisis was
a significant force behind the 2008–
2012 global recession and a key
contributor to the European
Sovereign-Debt Crisis.

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32. Sub-prime crisis / housing bubble
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf
http://www.milkeninstitute.org/pdf/riseandfallexcerpt.pdf
http://www.oecd.org/finance/financialmarkets/40451721.pdf
http://www.slideshare.net/robinthieu/subprime-mortgagecrisis-2008-presentation-646026
http://www.slideshare.net/amarranu/sl-vs-subprime-final
http://money.cnn.com/news/storysupplement/economy/bail
outtracker/
http://www.bloomberg.com/apps/news?pid=newsarchive&sid
=aZchK__XUF84
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
http://www.nytimes.com/interactive/2009/02/04/business
/20090205-bailout-totals-graphic.html?_r=0
http://www.conservapedia.com/Financial_Crisis_of_2008
http://online.wsj.com/news/articles/SB10001424127887324
059704578473310943230002
http://money.cnn.com/news/storysupplement/economy/bail
outtracker/
http://www.investopedia.com/articles/07/housing_bubble.as
p
http://economistsview.typepad.com/economistsview/
2009/07/what-caused-the-housing-bubble.html
The Journal of Business Inquiry
http://www.uvu.edu/woodbury/jbi/volume8/journals/
SummaryofthePrimaryCauseoftheHousingBubble.pdf
http://online.wsj.com/news/articles/SB1238112257164
53243
http://www.frbsf.org/education/publications/doctorecon/2002/january/federal-funds-discount-rate-2001
http://www.imf.org/external/np/seminars/eng/2012/
fincrises/pdf/ch12.pdf
http://www.ritholtz.com/blog/2011/12/bailout-total29-616-trillion-dollars/
http://www.conservapedia.com/Financial_Crisis_of_20
08
http://topinfopost.com/2013/12/18/700-billion-bankbailout-was-a-lie-it-was-secretly-7-trillion

33. This presentation is provided in the sake of public interest, and has been compiled based on
publically available information sources on the web.
While great care has been taken in the preparation and compilation of information indicated here,
the author does not accept any legal or other liability for any inaccuracy, mistake, misstatement or
any other error of whatsoever nature contained herein.
This presentation is not investment advice, not a solicitation for any type of investment, financial
or otherwise, nor is this presentation an opinion expressed on, nor endorsement of markets,
commodities or investments.
Any names, trademarks and images are copyright their respective owners and rights in the
graphic artwork and photos used in this presentation belongs to, and are courtesy of the
respective owners thereof. Unless where otherwise indicated, I don’t claim to have any rights
therein.