This document provides an overview of the 2008 subprime mortgage crisis in the United States. It defines subprime loans as high-risk loans given to borrowers with poor credit. In the early 2000s, low interest rates and rising home prices fueled increased subprime lending. However, starting in 2006, subprime borrowers began defaulting on mortgages as home prices declined. These mortgage defaults led to losses in mortgage-backed securities, damaging global financial markets and resulting in a global recession in 2008. India was less impacted than other countries due to regulations on its financial system and restrictions on risky lending practices.
2. MEANING OF SUBPRIME :
• The word means subordinate to primary
• It is the loan given to people with a bad credit rating
who are not eligible for Prime loan ( normal loans )
• Characterized by higher interest rates, poor quality
collateral, and less favorable terms in order to
compensate for higher credit risk
• Sub-prime lending may be utilized for sub-prime
mortgages, sub-prime car loans, sub-prime credit cards
etc.
MEANING-
3. Why are Subprime loans issued ?
• For banks to earn more money by tapping the defaulting
customers
• For young people who do not have enough money for
down payment
• For people having financial problems
• For people who are discriminated
REASONS -
4. • The US subprime mortgage crisis was a set of events and conditions that led to a financial
crisis and subsequent recession that began in 2008
• Characterized by a rise in the inability to pay housing mortgages resulting in the decline of
securities backed by mortgages
• These mortgage-backed securities (MBS) initially offered attractive rates of return
• However, the lower credit quality ultimately caused massive defaults
• The money was sucked out of several banks, financial institutions and the economy as a
whole in September 2008
• Several European and developing countries had invested heavily in American banks
• The subsequent loss of funds resulted in the Global Recession of 2008
Subprime Crisis in Brief
5. • 2000-2005 :
Very low interest rates, property prices were on a rising
trend and the sub prime borrowers were able to meet
their obligations by selling the properties or getting the
properties refinanced
This created what is called ‘The Housing Bubble’
HOUSING BUBBLE
6. • 2006-2008 :
More subprime borrowers failed to pay their debts
Securities held by mortgages lost value globally
Global investors also drastically reduced purchases of
mortgage-backed debt and other securities
PROCEEDINGS
8. • Owning a home is part of the 'American Dream'. It allows
people to take pride in a property and engage in a
community for the long term.
• However, homes are expensive and most people need to
borrow money to get one.
• The conditions were right for people to achieve that
dream. In the early 2000s, mortgage interest rates were
low, which allow you to borrow more money with a lower
monthly payment. In addition, home prices increased
dramatically, so buying a home seemed like a sure bet.
• Lenders understood that homes make good collateral so
they were willing to participate.
• The mortgage crisis was triggered as this situation built
momentum.
The American Dream
9. DOT COM COLLAPSE – 2000
SEPTEMBER 11 TERRORIST ATTACK
12. When house prices ceased rising in mid 2006
and then started falling, subprime mortgage
defaults began accelerating.
Effects
• Sub prime borrowers
• Financial institutions
• Banks
2006
13. • On December 1, 2008, the National Bureau of
Economic Research announced that the economy
had entered into a recession in December of 2007.
Real GDP increased by only 0.4 percent for the year
2008, and it decreased at annual rates of 5.4
percent in the 4th quarter of 2008 and 6.4 percent in
the 1st quarter of 2009. The unemployment rate
increased from 4.9 percent in December of 2007 to
9.5 percent in June of 2009.
• The total real estate equity in The United States was
valued at $13 trillion during the 2006 peak, had
fallen to $8.8 trillion by mid 2008.
2008
15. The Main
Players
The people who
contributed to the deadly
chain of events that sent
the entire world economy
into recession.
16. • Continued Reduction
in Fed Rates
• Sudden increase in
Money supply
• Rates remained low
till 2005
• High Liquidity
The Federal Reserve
17. • Lowered to lending rates to increase loan off
take
• As the prime market was nearing saturation,
began lending to subprime borrowers
• Aggressively sold MBS, CDO
• Additional funds raised by securitization was re-
deployed in the same manner
Commercial Banks
19. • Increased use of Secondary mortgage market
• Lenders sold their mortgages in the secondary
market
• Pooled mortgages into securities like CDOs and
MBS
Investment Banks
20. Investors:
• Investors were the ones willing to purchase
these CDOs at ridiculously low premiums over
Treasury bonds.
• These enticingly low rates are what ultimately
led to such huge demand for subprime loans.
INVESTORS-
22. • Fuelled volatility through credit arbitrage
• Credit Default Swaps
• Influenced banks to bring out more MBS &
CDOs as it was a good avenue to invest in
Hedge Funds
23. The worst hit economies
Source: Wikipedia
Denotes the real GDP Growth during 2009.
(Countries in brown represent those in recession)
25. Impacts of the US Financial Crisis
on India
The US meltdown which shook the world had little
impact on India, because of India’s strong
fundamental and less exposure of Indian
financial sector with the global financial market.
Perhaps this has saved Indian economy from
being swayed over instantly. Unlike in US
where capitalism rules, in India, market is
closely regulated by the government.
27. Year Growth (US$ Bn)
2006-07 22.6
2007-08 29.0
2008-09 13.7
2009-10 -3.6
2010-11 29.5
India’s export growth rate
15 per cent of total export in 2006-07 was directed toward USA.
Official statistics released on the first day of the New Year, showed that
exports had dropped to $1.5 billion in November 2008, (Sivaraman,
2008) from $12.7 billion a year ago.
Manufacturing sectors like leather, textile, gems and jewellery got hit
hard.
30. BSE ‘SENSEX’ PERFORMANCE IN 2008
Month Open High Low Close
January 20325.27 21,206.77 15,332.42 17468.71
February 17820.67 18,895.34 16,457.74 17578.72
March 17227.56 17,227.56 14,677.24 15644.44
April 15771.72 17,480.74 15,297.96 17287.31
May 17560.15 17,735.70 16,196.02 16415.57
June 16591.46 16,632.72 13,405.54 13461.60
July 13480.02 15,130.09 12,514.02 14355.75
August 14064.26 15,579.78 14,002.43 14564.53
September 14412.99 15,107.01 12,153.55 12860.43
October 13006.72 13,203.86 7,697.39 9788.06
November 10209.37 10,945.41 8,316.39 9092.72
December 9162.94 10,188.54 8,467.43 9647.31
Source: http://www.bseindia.com/indices/indexarchivedata.aspx
31. Impact on India’s trade
Impact on India’s handloom
sector, jewellery export and
tourism
Exchange rate depreciation
Information technology-BPO
sector
Foreign institutional investors
and FDI
32. This crisis also shows the failure of capitalist
market economy while the Indian economy
would be able to withstand the crisis without
any major difficulty
34. Role of Black Money
Lending based on ‘calls’
large portion of organised
lending is with public sector
banks
35. • He started sensing that real
estate, in particular, had entered
bubble territory before the crisis.
• One of the first moves he made
was to ban the use of bank loans
for the purchase of raw land.
• Only when the developer was
about to commence building
could the bank get involved —
and then only to make
construction loans.
ONE MAN ARMY of Dr. Y.V. Reddy!
36. • Reddy pushed interest rates up to more than 20
percent, which of course dampened the housing
frenzy.
• He made banks put aside extra capital for every
loan they made.
• In effect, Mr. Reddy was creating liquidity even
before there was a global liquidity crisis.
Asian Countries were also sending surplus funds into the US economy to help revive it
JP Morgon Chase, Citigroup, Deutsche bank, Goldman Sachs, Lehman brothers, Bank of America, Merill Lynch, RBS
Aggressively sold MBS, thus off loading such loans from their Balance Sheet
MBS sold to banks, instituttions, hedge fund, investment banks, govts: japan, europe, russia (mainly)
CDO-collateralized debt obligation
MBS: mortgage backed security
Non-traditional mortgages (such as 2/28 (section) and interest-only mortgages) that offered low introductory rates and minimal initial costs such as "no down payment”
Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad.
The increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum.
A lot of the demand for these mortgages came from the creation of assets that pooled mortgages together into a security, such as a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.
Max : bought by japan,europe, russia
They are out of regulatory control. Supposed to sell to knowledgeable investors, thus less paper work, less disclosures. Not their money.
MBS, COD Promoted because they were issued at small premium over Gsec and assured high returns if and when the loans got serviced (refinanced by the borrower)
With the US and several European countries slipping under the full blown recession, Indian exports have run into difficult times, since October. Manufacturing sectors like leather, textile, gems and jewellery have been hit hard because of the slump in the demand in the US and Europe. Further India enjoys trade surplus with USA and about 15 per cent of its total export in 2006-07 was directed toward USA. Indian exports fell by 9.9 per cent in November 2008, when the impact of declining consumer demand in the US and other major global market, with negative growth for the second month, running and widening monthly trade deficit over $10 billions.
Official statistics released on the first day of the New Year, showed that exports had dropped to $1.5 billion in November this fiscal year, (Sivaraman, 2008) from $12.7 billion a year ago, while imports grew by $6.1billion to $21.5 billion.
The global financial crisis has had a deep impact on Indian stock market: within one year
(2008), there occurred a more than 50 percent fall in the SENSEX of Bombay stock exchange,
the Bombay stock exchange benchmark
index, which touched a high of 21,206 in January 2008,
fell down to less than 10,000 during December 2008, shows the clear picture of the down fall off
the stock market in India