Subprime lt4
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Presentation on Subprime Crisis by LT 4
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Subprime lt4
- 1. Mortgage Lending Models -Beginning
- 2. HOW SUB PRIME CRISIS SPREAD? FINANCIAL INSTITUTION MBS SECURITISATION CDO PROCEEDS SALE of LOAN INVESTORS LOAN SUB-PRIME BORROWER BUYING HOME SUB-PRIME LENDER CDS LOWEST RISK / HIGHEST RATING ( SENIOR ) MEDIUM RISK ( MEZZANINE ) HIGHEST RISK / ( EQUITY ) BANKS HEDGE FUNDS INSURANC E COS . PENSION FUNDS
- 3. Rise of Mortgage Bond Market Mortgage Bond > 32% Sub-prime lending 800$bn (2006) form 200$bn (2001) Force closure , 2mn families affected -> wave across US
- 4. How it went wrong ???? Bubble burst …
- 7. Effect on global economy……
Hinweis der Redaktion
- Traditionally, banks have financed their mortgage lending through the deposits they receive from their customers. This has limited the amount of mortgage lending they could do. In recent years, banks have moved to a new model where they sell on the mortgages to the bond markets. This has made it much easier to fund additional borrowing, But it has also led to abuses as banks no longer have the incentive to check carefully the mortgages they issue. The private sector has dramatically expanded its role in the mortgage bond market, which had previously been dominated by government-sponsored agencies like Freddie Mac.
- The private sector has dramatically expanded its role in the mortgage bond market, which had previously been dominated by government-sponsored agencies like Freddie Mac. They specialised in new types of mortgages, such as sub-prime lending to borrowers with poor credit histories and weak documentation of income, who were shunned by the "prime" lenders like Freddie Mac. They specialised in new types of mortgages, such as sub-prime lending to borrowers with poor credit histories and weak documentation of income, who were shunned by the "prime" lenders like Freddie Mac. They also included "jumbo" mortgages for properties over Freddie Mac's $417,000 (£202,000) mortgage limit. The business proved extremely profitable for the banks, which earned a fee for each mortgage they sold on. They urged mortgage brokers to sell more and more of these mortgages. Now the mortgage bond market is worth $6 trillion, and is the largest single part of the whole $27 trillion US bond market, bigger even than Treasury bonds.