The document discusses the subprime mortgage crisis that occurred in the United States. It begins by defining prime and subprime loans, with subprime loans going to borrowers with poorer credit histories and higher interest rates. A housing bubble formed as subprime mortgages increased and home prices rose, but this bubble eventually burst in 2005-2006. As home prices dropped and borrowers defaulted on subprime loans, large losses were incurred by financial institutions, investment banks, and foreign investors. The US government responded with a $800 billion bailout package and other legislation to provide relief and regulate derivatives that had worsened the crisis.

2. • What is subprime & prime?
• What is crisis?
• How subprime crisis developed?
• Housing bubble burst
• Subprime crisis: losses
• Response to the crisis
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PRESENTATION OUTLINE

3. PRIME LOANS AND SUBPRIME LOANS
• PRIME - borrowers - good credit - lower interest - low
rates compared to subprime
• SUBPRIME - borrowers - bankruptcies, defaults, or late
payment histories
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4. • An unstable and dangerous situation -
individual, group, community or whole
society.
• Negative changes - economic, political, social
or environmental affairs,
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WHAT IS CRISIS……???

5. 5
HOUSING BUBBLE
DEVELOPMENT………

6. THE SUBPRIME MORTGAGE CRISIS
• Until 2006, US housing market - flourishing - so easy to get a
home loan
• Subprime mortgages - expectations - home price - continue to
rise - refinance their home - before the higher interest rates
were to go into effect
• 2005 - peak of the subprime boom - 1 in 5 was subprime
• Reset – higher interest rate – higher amount / Month
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7. Large Loan given at
low rate of interest
FINANCIAL INSTITUTUION/
INVESTMENT BANK
Small loans
distributed at high
rate of interest
Money is Invested
HIGH profits
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8. America faced BUBBLE trouble!
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Sources:
Glick R. & lansing K. J. 2010. “Global Household Leverage, House Prices, and Consumption”. FRBSF Economic Letter.
http://www.frbsf.org/economic-research/publications/economic-letter/2010/january/global-household-leverage-house-prices-consumption/

9. THE SUBPRIME MORTGAGE CRISIS
• Defaults (Borrower) – Foreclosure (Bank) – Auction (Bank)
• Auction (Bank) - Sell lower price – inadequate to close –
difference to be paid (Borrower)
• Selling homes - PROBLEM – home prices ↓ - not enough to
cover the mortgage
• In US
Housing market: 3 Mil. Foreclosures (2008)
Banking sector: $1-$2 tril. Bailout
World stock markets: 50% loss, $30 tril. Wealth disappeared (2008)

10. Subprime Defaulters
Bankrupt
FINANCIAL INSTITUTUION/
INVESTMENT BANK
Bankrupt
Investor House
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Housing market: 3 Mil.
Foreclosures (2008)
Banking : $1-$2 tril. Bailout
World stock: 50% loss, $30
tril. Wealth disappeared
(2008)

11. 11

12. • losses were not incurred by homeowners but by the
financial system.
• Large losses were incurred by the following groups:
- Mortgage lenders
- Investment banks
- Foreign investors
- Insurance companies
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THE SUBPRIME MORTGAGE CRISIS : Losses

13. • US: Bailout Package – around $800 bn
• Emergency Economic Stabilization Act of 2008 and
the Homeowners Affordability and Stability Plan.
• A bill called the Derivatives Markets Transparency
and Accountability Act of 2009 – to regulate the CDS
market.
Responses to the Crisis
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