This document summarizes the key events that led to the subprime mortgage crisis and current financial crisis. It describes how subprime mortgages were originated and then securitized into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs). These securities became highly complex and opaque. When the housing market declined, many subprime borrowers defaulted, causing the value of MBS and CDOs to plummet. This impaired the balance sheets of financial institutions and froze credit markets. The document outlines various experts' proposals to remedy the crisis, including government purchases of toxic assets, capital injections into banks, and establishing funds to remove bad assets from banks and resolve insolvent institutions.
Summerlin Asset Management, LLC (SAM), is a diversified real estate investment and management company. SAM's expertise is the purchase, service, and resale, of both performing and non-performing real estate notes secured by the Deed of Trust or Mortgage.
jimmy stepanian | Real estate commercial financing ideas | Jim stepanian |Jimmy Stepanian
The best real estate pros know a top deal when they see one. What is their secret? First, they have an exit plan the best deals are the ones where you realize you can walk away from.
Summerlin Asset Management, LLC (SAM), is a diversified real estate investment and management company. SAM's expertise is the purchase, service, and resale, of both performing and non-performing real estate notes secured by the Deed of Trust or Mortgage.
jimmy stepanian | Real estate commercial financing ideas | Jim stepanian |Jimmy Stepanian
The best real estate pros know a top deal when they see one. What is their secret? First, they have an exit plan the best deals are the ones where you realize you can walk away from.
NYU Economics Research Paper (Independent Study) - Fall 2010jsmar16
First of two research papers on issues involving the current economic downturn that I wrote during my senior year at NYU in collaboration with NYU professor, (both are pending professional publication).
First of two research papers on issues involving the current economic downturn that I wrote during my senior year at NYU in collaboration with NYU professor, (both are pending professional publication).
A bond is a (written and signed promise) debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate (Coupon Rate).
Jack Warner Sigworld - Discovery Day Pics By Ken Kindt Signworld | Group PhotoJack Werner Signworld
Jack Werner Signworld - Discovery Day Pics 3 By Ken Kindt of Signworld. Ken Kindt and Jack Werner of Signworld in a group pic with Signworld Business owners. See Conference Pic 3
NYU Economics Research Paper (Independent Study) - Fall 2010jsmar16
First of two research papers on issues involving the current economic downturn that I wrote during my senior year at NYU in collaboration with NYU professor, (both are pending professional publication).
First of two research papers on issues involving the current economic downturn that I wrote during my senior year at NYU in collaboration with NYU professor, (both are pending professional publication).
A bond is a (written and signed promise) debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate (Coupon Rate).
Jack Warner Sigworld - Discovery Day Pics By Ken Kindt Signworld | Group PhotoJack Werner Signworld
Jack Werner Signworld - Discovery Day Pics 3 By Ken Kindt of Signworld. Ken Kindt and Jack Werner of Signworld in a group pic with Signworld Business owners. See Conference Pic 3
Liquidity of an asset has been defined as a degree where asset or security can be bought or sold in the securities market and this sale or purchase is done without harming the asset’s price. Liquidity has its own benefits such as investment in liquid assets than the illiquid ones. The liquid assets can be easily converted into cash which include the blue chip and money market securities. The ease and comfort with which financial instruments such as stocks and bonds are converted into ownership is the main essence of liquid assets (Burke, n.d.). Liquidity problems can arise due to the following business factors such as:
Steven Glaze Kansas City one of the bests building contractor. He focuses on amending an existing structure rather than building latest one. He mainly improves design or performance and increases the home’s value and makes it more adorable to buyers. Of his main functions architectonics, design, and arrangement are main.
Classmate 1When a bank is unable to fulfill its obligations to .docxrichardnorman90310
Classmate 1:
When a bank is unable to fulfill its obligations to its depositors and creditors, it is considered to be insolvent. Additionally, it can occur when the belongings' market value decreases significantly in comparison to the accountability's market value. If the collapsed bank is unable to arrange funds from the solvent bank, the depositors of the collapsed bank will become incensed and attempt to withdraw their funds as soon as possible. Additionally, the collapsed bank will sell their belongings at a significantly lower price than their market value in order to obtain liquid funds for the urgently deposited individuals. (McLeay, Michael; 2016) As a result, the bank won't be able to meet the requirements of depositors.
-- One way to assign the fund in a way that reduces its exposure to particular assets or risks is through bank diversification. Diversifying by investing in a variety of assets to reduce risk is the most common strategy. And if the cost of the belongings hasn't changed perfectly, a larger portfolio will often have lower volatility than its least volatile component and a lower difference than the calculated average difference of its belongings. Furthermore, diversification is unquestionably one strategy for mitigating investment risk.
-- Everyone is trying to save more money and has stopped buying cash from their homes and cars. The bank has faced a significant challenge as a result, as they have lost a significant portion of their loan profits. In addition, the bank has experienced a severe economic downturn over the past seven years as a result of a large number of customers who are not appropriately repaying either the loan amount or the loan interest, resulting in substantial losses for the bank.
-- Additionally, during the recession, the bank will make a favorable offer to reduce their current interest rate by a small amount, attracting a greater number of borrowers ready to take out new loans. Because the government is attempting to encourage economic growth through policy divergence, taxes and government payouts will also differ significantly.
Classmate 2:
Diversification, on the other hand, ensures that a bank's risk is not concentrated in any one industry, so that the negative impact of downturns in a sector is reduced on the bank, thereby lowering the likelihood of the bank collapsing into bankruptcy. Diversification, therefore, is about the risk-financing of risk-taking activities to boost the return of the institution. An important issue in credit risk management is deciding whether the risks are related to the activity or the organization. Banks tend to be concentrated in a few large industries. They invest heavily in short-term borrowing and in emerging market bonds and equity securities. To diversify their risk, they have developed sophisticated analytical models to model financial risk (Manthoulis et al., 2020).
For the period from 1900 to 2000, the bank assets of the U.S. economy.
This is a free e-book from the London School of Economics. It includes several stand alone chapters. Each one of them is written by a different expert or professor. The main underlying topics include how to manage and prevent future financial crisis. And, what would be the best financial regulatory framework to do just that.
U.S. Lending Industry Meets Mortgage Process as a ServiceCognizant
In a challenging and changing market, mortgage process as a service, orMPaaS, can provide banks with the talent and systems to handle essen¬tial lending services, enabling them to focus on rebuilding their business through product innovation to capture market share.
An Analysis of the Limitations of Utilizing the Development Method for Projec...kylemrotek
Abstract: The rise and fall of subprime mortgage securitizations contributed in part to the ensuing credit crisis
and financial crisis of 2008. Some participants in the subprime-mortgage-backed securities market relied at least
in part on analyses grounded in the loss development factor (LDF) method, and many did not conduct their own
credit analyses, relying instead on the work of others such as securities brokers and rating agencies. In some
cases, the parties providing these analyses may have lacked the independence, or at least the appearance of it, that
would have likely better served the market.
A new appreciation for the value of independent analysis is clearly a silver lining and an important lesson to be
taken from the crisis. Actuaries are well positioned to lend assistance to the endeavor.
Mortgages are long-duration assets and, similarly, mortgage credit losses are relatively long-tailed. As casualty
actuaries are aware, the LDF method has inherent limitations associated with immature development. The
authors in this paper will cite examples of parties relying on the LDF or similar methods for projecting subprime
mortgage credit losses, highlight the limitations of relying exclusively on such methods for projecting subprime
mortgage credit performance, and conclude by offering general enhancements for an improved approach that
considers the underwriting characteristics of the underlying loans as well as economic factors.
2. Fixed income investing and particularly mortgage investing has taken on a decidedly different
look has in recent years. To be sure, the risks associated with investing in coupon-bearing investment
securities have not changed. Funding markets, however, have enabled creative financial engineers and
agile investors to change the nature of these risks by changing exposures to them and realigning
interests. Gary Gorton, John Kiff, and Paul Mills explore these innovations by examining the genesis,
evolution, and collapse of the subprime mortgage market. The collapse, government response, and
alternative remedies are outlined in the writings of Lucian Bebchuk, University of Chicago finance
faculty, and Campbell Harvey. I will summarize the markets and investment securities that are believed
to have caused our current financial crisis, and conclude with experts’ remediation proposals.
Since 2007, global financial markets have suffered near-cataclysmic damage, partially as a result
of irrational exuberance in residential real estate and associated mortgage markets. Kiff and Mills
define subprime mortgages as those loans with “a lower expected probability of full repayment”,
determined by the borrower’s credit record and FICO score, debt service-to-income ratio, and/or the
mortgage loan-to-value ratio. For its part, the government has, through passage of various laws since
1980, encouraged home ownership.1 In later years, financial intermediaries have created convoluted
funding channels in a process called securitization, explained below, and conflicts inherent in subprime
mortgage products misaligned the interests of borrowers, lenders, service providers, and investors.
The design of a subprime mortgage required that borrowers should need to refinance periodically
or risk distress, in order to avoid prohibitively high interest rates in the floating-rate period of the loan’s
life. Gorton explains that refinancing was not necessarily problematic for the lender or the borrower, as
long as home prices appreciated. The lender, however, owned greater exposure to the asset, because if
home prices fell2 and the borrower could not refinance (risking default), the lender was still long the
(depreciating) asset. (Gorton, 5) Another problem in refinancing: Unless the borrower’s credit had
improved prior to refinancing, the subsequent mortgage(s) were likely to be subprime, as well.
After origination, mortgages may have been held by the originator or securitized. A financial
institution – Citi, for instance – would pay the originator cash in the amount of the present value of the
mortgage; in turn, Citi would package that mortgage with others in a mortgage-backed security (MBS).
The MBS would then be divided into tranches, each of which gave the investor rights to certain
scheduled principal payments and/or prepayments. The theory went that packaging the mortgages
would achieve risk dispersion while directing specific risk/return payoffs to investors who with different
investment requirements. According to Gorton, “the amounts of credit enhancement for each tranche
1
Federal deregulation of interest rates (1980), legalization of floating-rate mortgages (1982), and tax-deductibility of
mortgage interest (1986) went far to “facilitate the development of the modern subprime mortgage market.” (Kiff, Mills)
2
Residential housing prices did indeed fall; See Exhibit A
3. and the size of each tranche depend on the cash flow coming into the deal in a significant way. The cash
flow comes largely from prepayment of the underlying mortgages through refinancing. What happens
to the cash coming into the deal depends on triggers which measure (prepayment and default)
performance of the underlying pools of subprime mortgages.”3
MBS were largely funded by another engineered vehicle, collateralized debt obligations
(CDOs), which Gorton describes as “special purpose vehicles that issue long-dated liabilities in the form
of rated tranches in the capital markets and use the proceeds to purchase structured products for assets.”
CDOs further divided their portfolios (which included other fixed income products in addition to
subprime MBS) into tranches, again prioritizing and allocating cash flows and losses by seniority. Some
CDO managers apparently added subprime mortgages to take advantage of rating arbitrage.4 Finally,
CDOs were funded by short-term commercial paper, medium-term notes, and money market funds.
Valuation of these convoluted and disparate vehicles was (and remains) troublesome,
exacerbated by less stringent marking requirements for MBS and CDOs. Each dealer bank would mark
these investments using proprietary information and conventions – that is until ABX indices were
introduced in 2006. The indices not only improved the transparency of subprime pricing, they allowed
investors to express an opinion on the subprime market. Investors’ views were not kind.5 Despite the
obvious difficulties in valuing each the underlying mortgages and then MBS and CDOs, dealer banks
largely did attempt to do just that. The introduction of the ABX indices, however, caused dealers to
abandon matrix valuation and mark these securities at trading prices. As a result, banks were forced to
write-downs assets, and some failed altogether, contributing to the current global economic contraction.
But where are these assets now? Markets for them are illiquid, so they continue to clog banks’
balance sheets – thereby preventing bank lending due to impaired asset bases. The U.S. government’s
Troubled Asset Relief Program (TARP) intends to directly intervene by infusing financial institutions
with capital in exchange for “toxic” assets.6 Academics largely agree that government capital infusions
should be mandated so as to prevent undue market reaction against firms that would otherwise have
voluntarily decided to recapitalize using TARP funds. They also reach unanimity that U.S. taxpayers
should be protected at all costs, and that assets should not be purchased at amounts greater than their
fundamental values.7 Where experts differ are in the forms of remediation. Because toxic assets are not
3
See Exhibit B for illustration of MBS
4
According to Gorton (14), “the spreads on subprime BBB tranches appeared to be wider than other structured products with
the same rating.”
5
Vintage 2006 subprime mortgages dropped by 80% in about 20 months. (See Exhibit C for recent ABX-HE BBB- pricing
levels and performance)
6
See Exhibit D for a current summary of TARP funds
7
Proposals intending to mitigate overpaying for assets include avoiding held-to-maturity prices, avoiding paying premium
prices for the assets of insolvent banks, allowing private investment managers to bid competitively for rights to manage
4. only difficult to value but likely to be fundamentally undervalued due to illiquidity, Lucian Bebchuk of
Harvard Law School argues that, instead of merely purchasing these assets, they should demand new
equity in return, to protect against buying at premium prices. She goes on to argue that asset
management mandates should be awarded by competitive bidding, to minimize costs and conflicts.
University of Chicago professors Douglas Diamond, et al further the aim of establishing a plan at
the lowest public cost. They also concentrate on the current recession and prevention of unintended,
long-term effects. The inability of undercapitalized financial institutions to function normally has a
contagious effect on the economy; so, one of the Treasury’s goals should be to raise capital through
mandated government funding as well as public equity offerings. For banks unable to raise capital
easily in public markets, the government may take non-voting equity stakes – co-investment, so-to-
speak. Equity stakes offer protection in the event that the government has overpaid for bad assets.
Finally, Campbell Harvey of Duke University takes his views from the history of financial crises.
Harvey proffers establishment of two separate funds, one to take on the assets of insolvent banks (the
Resolution Trust Corporation) and another to remove bad assets from solvent banks (the Bank
Capitalization Fund); together, the two funds ultimately intend to restore confidence and lending
capabilities. The BCF should receive 2-5% of a bank’s existing stock (mandated, again) while allowing
private investors to co-invest in the fund.8 Campbell also ascribes to a time limit on government
investments. He also argues for recapitalizing the FDIC quickly and raising most insured limits to
prevent further bank runs. Insofar as burdensome mortgages go, Campbell is partial to helping
homeowners by resetting principal and allowing prepayments penalty-free. He also pays closer attention
to non-financial institutions in distress (e.g. Ford Motor Company) to reduce further spillover.
At Morgan Stanley from 2004 to 2008, I had the opportunity to research MBS, CDOs, IO/POs,
and ABX. Our senior investors echoed the sentiments that these investments were safe due to
subordination and effective hedging; further, they argued, the yield pickup outweighed most risks. I
disagreed. The convoluted, engineered, and synthetic nature of these instruments hid risks that were
inappropriate for even the most sophisticated investors. After I left the firm in February, losses caused
most of MSIM’s fixed income business to be dismantled. These readings reaffirmed my feelings, and I
believe that our society at-large will continue to suffer until the last subprime principal payment is made.
assets, establishing particular types of auctions to establish trading prices, and obtaining equity stakes in the case that prices
paid are too high.
8
This is similar to actions taken by the governments of The Netherlands, Belgium, Luxembourg, and France, as well as BNP
Paribas, to divide the assets of Fortis Bank and Fortis Insurance, among others
5. Exhibit A: U.S. Residential Housing Prices
Home Price Indices Performance 1999-2008
240
220
200
OFHEO
Index Level
180 (Seasonally Adjusted)
Case-Shiller Composite-10
160
Case-Shiller Composite-20
140
120
100
Sources: Standard & Poor’s, Office of Federal Housing Enterprise Oversight
6. Exhibit B: MBS Structure
$I $P
Source: Kevin Kendra, Fitch, “Tranche ABX and Basis Risk in Subprime RMBS Structured Portfolios,”
February 20, 2007
8. Exhibit D: Summary of TARP Funds
Funds Awarded or Expected Greater than $1 billion
Expected Write- Capital
Date Company Type Heaqdquarters Investment Funds Awarded downs Raised
Oct. 14 Citigroup Bank New York $50,000 Yes $65,700 $74,000
Nov. 14 Philadelphia, Phoenix and Atlanta U.S. cities N.A. $50,000 N.A. N.A.
Nov. 10 A.I.G. Insurer New York $40,000 Yes N.A. N.A.
Oct. 14 JPMorgan Chase Bank New York $25,000 Yes N.A. N.A.
Oct. 14 Wells Fargo Bank San Francisco $25,000 Yes $17,700 $41,800
Oct. 14 Bank of America Bank Charlotte, N.C. $15,000 Yes $27,400 $55,700
Dec. 31 General Motors Automaker Detroit $13,400 Yes, but $4 billion is pending N.A. N.A.
Oct. 14 Goldman Sachs Group Bank New York $10,000 Yes $4,900 $20,500
Oct. 14 Merrill Lynch Bank New York $10,000 Yes $55,900 $29,900
Oct. 14 Morgan Stanley Bank New York $10,000 Yes N.A. N.A.
Dec. 31 PNC Financial Services Group Bank Pittsburgh $7,579 Yes N.A. N.A.
Nov. 03 U.S. Bancorp Bank Minneapolis $6,599 Yes $2,200 $6,600
Dec. 29 GMAC Financial Services Specialty lender New York $5,000 Yes N.A. N.A.
Dec. 31 SunTrust Banks Bank Atlanta $4,850 Yes, two allocations N.A. N.A.
Jan. 02 Chrysler Automaker Auburn Hills, Mich. $4,000 Yes N.A. N.A.
Oct. 27 Capital One Financial Bank McLean, Va. $3,555 Yes N.A. N.A.
Oct. 24 Regions Financial Bank Birmingham, Ala. $3,500 Yes N.A. N.A.
Dec. 31 Fifth Third Bancorp Bank Cinncinati $3,408 Yes $2,700 $2,600
Nov. 14 Hartford Financial Services Group Insurer Hartford, Conn. $3,400 N.A. N.A.
Oct. 27 BB&T Bank Winston-Salem, N.C. $3,134 Yes N.A. N.A.
Oct. 14 Bank of New York Mellon Bank New York $3,000 Yes N.A. N.A.
Oct. 27 KeyCorp Bank Cleveland $2,500 Yes $1,600 $4,200
Dec. 31 CIT Group Specialty lender New York $2,330 Yes N.A. N.A.
Oct. 27 Comerica Bank Dallas $2,250 Yes N.A. N.A.
Oct. 14 State Street Bank Boston $2,000 Yes N.A. N.A.
Nov. 18 Principal Financial Group Bank Des Moines, Iowa $2,000 N.A. N.A.
Nov. 14 Marshall & Ilsley Bank Milwaukee $1,715 Yes $1,500 $1,700
Oct. 27 Northern Trust Bank Chicago $1,576 Yes N.A. N.A.
Oct. 28 Zions Bancorporation Bank Salt Lake City $1,400 Yes N.A. N.A.
Oct. 27 Huntington Bancshares Bank Columbus, Ohio $1,398 Yes N.A. N.A.
Amounts in millions USD
Source: New York Times Dealbook, January 7, 2009