Basics On Sub Prime - Kazim Ali Khan Mafoi

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Sub-prime crisis - the demon

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Basics On Sub Prime - Kazim Ali Khan Mafoi

  1. 1. NOTE ON SUBPRIME LENDING ITeS Vertical – Notes September 08 Confidential ITeS Vertical
  2. 2. SUB PRIME LOAN A type of loan that is offered at a rate above prime to individuals not qualifying for normal loan Subprime borrowers are often turned away from traditional lenders because of their low credit ratings Subprime loans tend to have a higher interest rate than prime rate offered on traditional loans Different lenders charge different rates in subprime loan
  3. 3. BASIC TYPES OF SUB PRIME LOANS Pay Pay ns Loa Op Op nl y tion tion st O Types of Lo Loa ere ans Subprime ns Int Mortgages Hybrid Mortgages
  4. 4. BASIC TYPES OF SUBPRIME LOANS Interest-only payments, borrowers pay only interest for a period of 5-10 years "pay option" loans, are adjustable rates, borrowers choose their monthly payment (full payment, interest only, or a minimum payment ) and so-called "hybrid" mortgages with initial fixed rates that sooner/ later convert to adjustable rates; includes the "2-28 loan", which offers a low initial interest rate fixed for two years
  5. 5. PARTICIPANTS & BENEFITS
  6. 6. HOME OWNER INDIVIDUALS, LENDER/ TRUST/ PENSION FUNDS, MORTGAGE TRUSTEE UNDERWRITER CONDUIT INSURANCE BROKER COMPANIES SERVICER Participants in the Subprime Loan
  7. 7. LENDERS PROFILE IN SUBPRIME LOAN Lenders take risks associated with lending to people with allegedly poor credit ratings Subprime loans carry a far greater risk for the lender due to the credit risk characteristics of typical subprime borrower Lenders offset the risk with a higher interest rate Subprime customer may be charged higher late fees, higher over limit fees, yearly fees, or up front fees for the card
  8. 8. CRITERIA BASED – BORROWER PROFILE Not more than 2 or Non Bankruptcy in more loan the last 7 years payments in the last 30 days BORROWERS PROFILE Accurate credit A credit score of lined data by the not less than 620 underwriter
  9. 9. Borrowers- Access to Investors- credit despite poor Opportunity to credit history diversify Portfolio Mortgage Originator- Makes money by the difference between the PARTICIPANTS Greater integration for interest of the market financial and capital and the premium charged to the borrower & markets BENEFITS Securities Dealer- Makes Source of funds for money by selling the banks and other securities and charging institutions commission on the underwriting BENEFITS TO THE PARTICIPANTS IN SUBPRIME MARKET
  10. 10. EFFECTS OF SUBPRIME LOANS
  11. 11. Subprime Loan Late Possession, High Rate Charge offs and Bankruptcy Repercussions Subprime Loan Preclusion from Obtaining any Type Subprime Loan of Conventional Loan Effects of Subprime Loan
  12. 12. IN THE CONTEXT OF U.S. SUBPRIME MARKET SCENARIO 1. In late 2006, the U.S. subprime mortgage industry saw a shift that was referred as a meltdown 2. Steep rise in the rate of subprime mortgage defaults has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy 3. The failure of companies has caused prices in the $6.5 trillion mortgage backed securities market to collapse, threatening broader impacts on the U.S. housing market and economy as a whole 4. The crisis is ongoing and has received considerable attention from the U.S. media and from lawmakers during the first half of 2007
  13. 13. EFFECTS OF SUMPRIME CHALLENGES Effect on Home Owners - As home prices have declined caused by speculation re- financing standards have tightened Effect on Jobs of the Financial Sector According to Bloomberg, from July 2007 to March 2008 financial institutions laid off more than 34,000 employees. In April, Citigroup announced an extra 9,000 layoffs for the remainder of 2008 In April, Merrill Lynch planned to terminate 2,900 jobs by year end. At Bear Stearns fear is that half of the 14,000 jobs could be eliminated once JP Morgan completes acquisition Effect on Minorities- About 46% of Hispanics and 55% of African Americans who obtained mortgages in 2005 got higher-cost loans compared with about 17% of whites and Asians Effect on Tenants - Many renters have been forced from their homes by foreclosures due to their landlords defaulting on loans
  14. 14. EFFECTS OF SUBPRIME MARKET Effect on Stock Markets Investors have taken their money out of risky mortgage bonds/ shaky equities and put it into commodities as "stores of value" Effect on Financial Institutions ICICI, India's second largest bank, has reported loss of $263 million in loans/ investment exposures Effect on Insurance Companies There is concern that some homeowners are turning to arson as a way to escape from mortgages they can't or refuse to pay Effect on Municipal Bond “Monoline" Insurers A secondary cause and effect of the crisis relates to the role of "monoline" insurance corporations; Ambac and MBIA. By insuring municipal bond issues, those bonds achieve higher debt ratings
  15. 15. US SUBPRIME CRISIS – INDIA IN CONTEXT
  16. 16. MACRO INDICATORS Increased Interest Rates Cyclical nature of the real estate market Stagnation of the Housing prices Share Prices dipped considerably Loan Write Offs Decision Making Process Investment Bank Rectification at Beginning of the Plans on Hold the base level Subprime Mess Purchase Occasion Buyer Behavior Functional Needs Systems Economics
  17. 17. FEEL FACTOR OF SUBPRIME CRISIS ON INDIAN ECONOMY India should escape major fallout from the US sub prime credit turmoil It remains far less exposed to global financial upheaval than many countries India appears to be in a strong position to withstand aftershock as the country has largely a domestically driven economy with limited trade dependence India's banking sector is not directly exposed to sub prime woes unlike some banks in Britain, Germany and elsewhere
  18. 18. Continued… A possible US economic slowdown could hit budgets of cost-conscious firms, but this accounts for only 5.4 percent of India's GDP. Some insist that subprime upheaval could cause a "significant" slowdown, as "Global risk" has been at the heart of India's current growth acceleration cycle However, if the current global risk aversion trend continues for more than three months, India could face a significant deceleration in growth It all boils down to international integration our growth story is still one mainly of domestic demand.
  19. 19. MAJOR COMPANIES THAT HAVE MORTGAGE PROCESSES
  20. 20. Various Positions in Mortgage Processing EXECUTIVE/ORIGINATION Executive Management Origination Channels Retail Telemarketing Wholesale SECONDARY/CAPITAL MARKETS Loan Portfolio Management Loan Securitization/Loan Pooling Pricing Quantitative Analysis Sales/Investor Relations Secondary/Capital Markets
  21. 21. Continued… Management Secondary/Capital Markets Support Trading OPERATIONS/SERVICING AND INFRASTRUCTURE Customer Service Finance Loan Operations Loan Workout Marketing & Communications Quality Control/Compliance Risk Management Technology Underwriting
  22. 22. Company- Mortgage Processing AEGIS MORTGAGE CORPORATION AEGON USA REALTY ADVISORS, INC. AMERICAN GENERAL FINANCE AMERICAN HOME MORTGAGE AMTRUST BANK ARVEST BANK OPERATIONS ASSURITY FINANCIAL SERVICES LLC ASTORIA FEDERAL SAVINGS AURORA LOAN SERVICES AVELO MORTGAGE, LLC BANK OF AMERICA BANK OF MONTREAL BANK UNITED BARCLAYS CAPITAL GROUP BMO FINANCIAL GROUP BNC MORTGAGE, INC. BRANCH BANKING & TRUST CO. CENLAR CHEVY CHASE BANK CITI CONSUMER LENDING GROUP
  23. 23. D.B. HOME LOANS DOWNEY SAVINGS & LOAN EMC MORTGAGE EQUIFIRST EVERBANK FANNIE MAE FIFTH THIRD BANK FIRST FRANKLIN (MERRILL LYNCH) FIRST TENNESSEE BANK/ FIRST HORIZON HOME LOANS FIELDSTONE MORTGAGE COMPANY FREDDIE MAC GMAC HOMESTREET BANK HOMEQ SERVICING HSBC BANK USA HUNTINGTON BANCSHARES INCORPORATED INDYMAC BANK ING MORTGAGE JOHNSON FINANCIAL GROUP, INC. JP MORGAN CHASE HOVNANIAN ENTERPRISES, LLC KEYCORP KH FINANCIAL, L.P.
  24. 24. DIVISION LENDINGTREE, INC. LINCOLN MORTGAGE COMPANY LITTON LOAN SERVICING LP M & T BANK MARKET STREET MORTGAGE CORPORATION MARRIOTT VACATION CLUB INTERNATIONAL MDC HOLDINGS, INC. MIDFIRST BANK MORGAN STANLEY HOME LOANS MORTGAGE GUARANTY INSURANCE CORP. NATIONAL COOPERATIVE BANK NATIONAL CITY CORPORATION NATIONWIDE INSURANCE ONE WASHINGTON FINANCIAL, LLC OPTEUM FINANCIAL SERVICES, LLC OPTION ONE MORTGAGE PHH MORTGAGE PLAZA HOME MORTGAGE, INC. RBC FINANCIAL GROUP REGIONS FINANCIAL CORPORATION RESMAE MORTGAGE CORP SAXON MORTGAGE (MORGAN STANLEY) SCME MORTGAGE BANKERS INC. SHEA FINANCIAL SERVICES
  25. 25. CITIMORTGAGE CITIZENS BANK COLORADO HOUSING FINANCE AUTHORITY COMPASS BANK SN SERVICING CORPORATION SOVEREIGN BANK STERLING SAVINGS BANK SUNTRUST BANK, INC. SYNOVUS FINANCIAL CORPORATION TECHNOLOGY CREDIT UNION TITLE RESOURCE GROUP THORNBURG COMPANIES UNION BANK OF CALIFORNIA UNIVERSAL AMERICAN MORTGAGE CO., LLC USAA WACHOVIA CORPORATION WASHINGTON MUTUAL WEBSTER BANK WELLS FARGO HOME MORTGAGE WILSHIRE CREDIT CORPORATION (MERRIL
  26. 26. Companies in India 1. Accenture 1. Infosys 2. ACS 2. iSeva 3. Adventity 3. Karvy 4. Aegis 5. Capgemini 4. Motif 6. Cognizant 5. Nipuna BPO 7. e4e 6. Ocwen 8. Group,Equinox 7. Office Tiger (RRD), 9. iflex 8. Quattro BPO 10. EXL Service 11. Fidelity National Information 9. Sutherland Services, 10. TCS 12. First Source 11. Trans works 13. Fiserv 12. Aditya Birla 14. Genpact 15. HCL BPO 13. US Technology Global 16. Hexaware 14. Wipro 17. IBM Daksh 15. WNS Global 18. iGATE 16. Xansa 19. Indecomm 17. Zenta
  27. 27. MORTAGE PROCESS IN INDIAN BPO COMPANIES 1. Loan Processing &Underwriting 2. Document Procurement 3. Rate Lock Management 4. Employment Verification 5. Automated Underwriting 6. Document Preparation 7. Credit Review 8. Good Faith Estimate 9. Loan Process Indexing 10. Rate Quotes 11. 1003/1008 Input, 12. Phone Based Qualifications 13. Order Appraisal 14. Title Hazard & Flood, Closing & Funding 15. Trust/Deed Agreement Review 16. Cross Selling 17. Lead Generation 18. Review of Compliance & HOI Documents
  28. 28. CONTINUED.. MORTGAGE BANKING BPO: servicing management includes outsourced tasks of : 1. Loan Boarding 2. Escrow Analysis 3. Taxes 4. Insurance 5. Lien Release 6. Loss Mitigation 7. Payoff 8. Commercial Mortgages 9. Early Collections 10. New Loan Audit 11. Skip Tracing 12. Welcome Calls 13. ARM Audits 14. Default Loan Setup
  29. 29. MEASURES TAKEN TO MANAGE THE CRISIS
  30. 30. MEASURES The Federal Reserve In August 2007, Federal Open Market Committee announced that interest rate cuts might be forthcoming The Fed is utilizing the Term auction facility (TAF) to provide short-term loans (liquidity) to banks In March 2008, the Fed also provided funds and guarantees to enable bank J.P. Morgan Chase to purchase Bear Stearns Loan modification Lenders /homeowners both benefit from avoiding costly and lengthy foreclosure . Litigation Litigation related to the subprime crisis is underway. A study in February 2008 indicated that 278 civil lawsuits were filed in federal courts during 2007 related to the subprime crisis.
  31. 31. MEASURES Media Media can help educate the public and parties involved by ensuring the top subject material experts engaged Bank Financial Health Certain major banks have reduced their dividend payouts to increase liquidity Credit Rating Agencies They are taking action to address perceived or actual conflicts of interest, including additional internal monitoring programs, third party reviews of rating processes, and board updates Regulation Regulators are considering action regarding lending practices, bankruptcy protection, tax policies, affordable housing, credit counseling, education and the licensing/qualifications of lenders
  32. 32. Thank You !

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