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Subprime Crisis

Subprime Crisis. The Banks. Leading Up to the Sub-Prime Crisis. Banks would refuse to lend money to those with bad credit or low income. -In order to get a mortgage, the qualifications were strict General process: 1. Broker provides mortgage loan

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Subprime Crisis

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  1. Subprime Crisis The Banks

  2. Leading Up to the Sub-Prime Crisis • Banks would refuse to lend money to those with bad credit or low income. • -In order to get a mortgage, the qualifications were strict • General process: 1. Broker provides mortgage loan 2. Broker sells mortgage to a bank 3. Firms collect thousands of mortgages each month that should continue throughout the life of the mortgages 4. Firm sells shares of that income to investors

  3. Leading Up to the Sub-Prime Crisis • Banks steadily loosened up on how they lend money: 1. SIVA- stated income, verified assets 2. NIVA- no income, verified assets 3. NINA- no income, no assets • Banks thought this would produce more mortgages and more securities

  4. Banks and The Subprime Crisis • Stock Prices dropped making banks lose money on investments • Risky Lending • Easy for consumers to get loans • High interest rates • Borrowers could not afford the payments • Borrowers would default • Home Foreclosures

  5. Banks and The Subprime Crisis

  6. Banks and The Subprime Crisis • HSBC was the first to announce that they would see larger than anticipated losses from rising defaults in 2007 • New Century Financial filed for bankruptcy court protection in 2007 • Bank of America agreed to acquire Merrill Lynch in 2008 • BOA doesn’t buy Lehman Brothers.

  7. Stock Prices During Subprime Crisis

  8. Impact In the U.S.

  9. Impact In the U.S. • Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. • Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. • Americans' second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008.

  10. Impact In the U.S. • Investors don’t want to buy Mortgage Back Securities (MBS) • Affect on Borrower Interest rates rise More difficult to get loans Defaulting

  11. How It Ended • New laws enacted The U.S. Senate voted to end mortgage kickbacks and “liar loans” The measure prohibits mortgage lenders from offering incentives to brokers who lead customers into more expensive loans. Homebuyers won’t be able to get a mortgage without producing pay stubs or other evidence they can make their monthly mortgage payments.

  12. After The Crisis • The number of troubled banks keep increasing, but banks are doing significantly better • Although the overall industry has had its best quarters in 2 years, the government says the number of troubled banks kept growing • For the first quarter in 2010, the net income of banks was $18 billion opposed to $5.6 billion exactly a year prior to that

  13. Lessons Learned • First, we can do a better job understanding interconnectedness. This means changing how we oversee and supervise financial intermediaries. • Second, we can change the system so that it is more self-dampening. • Third, we can improve incentives. • Fourth, we can increase transparency. • Fifth, we can develop additional policy instruments.

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