Bubble spotting - Subprime Mortgage crisis / Housing bubble 2007-2008


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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

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Bubble spotting - Subprime Mortgage crisis / Housing bubble 2007-2008

  2. 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. 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. 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. 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. 6. Net Capital rules were also suspended for some banks.
  7. 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. 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. 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. 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. 11. www.milkeninstitute.org/pdf/riseandfallexcerpt.pdf
  12. 12. Many of these loans were on predatory terms.
  13. 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. 14. All kinds of new financial products were developed during this period. Furthermore many banks simply took on too many bad loans.
  15. 15. New loans issued increased from $500 billion in 1990 to $2.4 trillion IN 2007.
  16. 16. From 2005, interest rates increased. Due to speculation, housing inventory increased, which resulted in a price reduction.
  17. 17. Due to decreasing prices, numerous mortgaged Homes were now worth less than the outstanding debt on these properties.
  18. 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. 19. Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States
  20. 20. This lead to an excess of available property inventory, further dropping the price.
  21. 21. At the same time, due to reduced repayments being received, many banks’ already compromised capital levels were being depleted.
  22. 22. Business Insider.com
  23. 23. In early 2007, 25 sub-prime lenders declared bankruptcy, announced substantial losses, or put themselves up for sale.
  24. 24. In late 2008, both Fannie Mae and Freddy Mac reported insolvency.
  25. 25. The US Treasury bailed out certain banks, but not others. Interest rates were lowered again.
  26. 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. 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. 28. * (Pledges vs actual expenditure estimates still differ hugely).
  29. 29. 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.
  30. 30. LIKED THIS PRESENTATION? Tell a friend - ”Like” or “tweet” this presentation now
  31. 31. 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
  32. 32. 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.