Sub prime crises final

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Sub prime crises final

  1. 1. Subprime crisis www.wordpandit.com
  2. 2. Subprime crisis What is subprime crisis ??? www.wordpandit.com
  3. 3. SUB PRIME CRISES: A BRIEF OVERVIEWIt is the practice of giving loans to borrowers who do not qualify for market interest rates owing to various risk factors such as :-Income levelSize of the downpaymentCredit historyEmployment status www.wordpandit.com
  4. 4. Hence subprime loan wouldmean high risk as well as high gain/profit www.wordpandit.com
  5. 5. Hence a subprime loan wouldmean high risk as well as high gain/profit • If I lend 10 prime loans of 1 Example lac each at 8% P.A. monthly reducing for tenure of 60 1 months , I can expect a return of 2,16,800/- www.wordpandit.com
  6. 6. Hence subprime loan wouldmean high risk as well as high gain/profit • If I lend 10 prime loans of 1 lac each at 8% P.A. monthly Example reducing for tenure of 60 months , I can expect a return 1 of 2,16,800/- • If I lend 10 sub-prime loans of Example 1 lac each at 10% P.A. monthly reducing for tenure of 60 2 months , I can expect a return of 3,34,400/- www.wordpandit.com
  7. 7. CAUSES of the criseswww.wordpandit.com
  8. 8. Securitization MortgageAdjustable CAUSES of Backed Rate SecurityMortgages the crises Government Inaccurate Sponsored Credit Ratings Enterprises www.wordpandit.com
  9. 9. Adjustable RateSecuritization Mortgages (ARM) www.wordpandit.com
  10. 10. Adjustable Rate Securitization Mortgages (ARM) A process of standardizing An ARM is a mortgage contractual terms which loan where the interestallows a loan to be packaged rate on the note iswith other contracts and sold periodically adjusted as a diversified bundle to based on a variety of passive investors. indices. www.wordpandit.com
  11. 11. Excessive risk takingInaccurate Credit in govt. sponsored Ratings enterprises www.wordpandit.com
  12. 12. Excessive risk takingInaccurate Credit in govt. sponsored Ratings enterprises Government sponsored enterprises are a group of Giving inaccurate credit financial services ratings was a major cause corporations created by of the subprime crisis. the United State Congress www.wordpandit.com
  13. 13. Mortgage Backed Security www.wordpandit.com
  14. 14. Mortgage Backed SecurityMortgage backed securities are a bundle of mortgages that have been sold by banks to Fannie Mae, who then repackages them and sells them to individual investors www.wordpandit.com
  15. 15. Impact of sub-prime crisis in USFinancial Market Sustained effects Financial Marketimpacts, 2007 impacts, 2008 www.wordpandit.com
  16. 16. • First subprime related loss was Financial reported by HSBC. market • Money was taken out of mortgage bonds and put intoimpacts, 2007 commodities as “stores of value” • Sub-prime related losses in banks Financial all over the world, wiped out much of the capital of the world banking market system by November 2008.impacts, 2008 • The crisis hit a key point when Lehman Brothers failed in Sept. www.wordpandit.com
  17. 17. • In Spring, 2011 there were about a million homes in foreclosure inSustained the United States, several million more in the pipeline, and 872,000 Effects previously foreclosed homes in the hands of banks www.wordpandit.com
  18. 18. LONG TERM SOLUTIONSU.S. Treasury Secretary Timothy Geithner testified before Congress on October29, 2009 which included five elements critical to effective reform:1. Expand the Federal Deposit Insurance Corporation bank resolution mechanism to include non-bank financial institutions2. Ensure that a firm is allowed to fail in an orderly way and not be "rescued“3. Ensure taxpayers are not on the hook for any losses, by applying losses to the firms investors and creating a monetary pool funded by the largest financial institutions4. Apply appropriate checks and balances to the FDIC and Federal Reserve in this resolution process5. Require stronger capital and liquidity positions for financial firms and related regulatory authority www.wordpandit.com
  19. 19. Thank You!Hope you had a pleasant learning experience. Feel free to contact us:mentor@wordpandit.com www.wordpandit.com

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