The Sub Prime Mortgage Scandal and You

1
The Sub Prime Mortgage Scandal and You

• Professor David J McConomy
• Queens School of Business

2
In The Beginning

• Companies Like GMAC, Ford Credit and GE Financed
  Purchases and Sold Off Loans
• Investors Made Good Returns and Companies
  Replenished Their Coffers To Sell More
• These Companies Continued The Process and Kept
  The Faith of The Investors
• A Market Developed For Securitized Debt

3
What Happened???

• Americans Began Buying More Homes
• Non-Bank Financial Institutions Began Lending
• House Prices Rose
• Americans Continued to Buy Homes
• House Prices Continued to Rise
• Etc. Etc. Etc.(Supply and Demand)

4
Remember When???

• Prospective Homebuyer Wants Mortgage

5
Evolution of the Process

Prospective Homebuyer Wants Mortgage
Servicer
6
Fees, Fees, Fees

• Mortgage Broker Earns a Fee
• Lender Earns a Fee
• Investment Bank Earns Fee (BIG)
• Broker Earns a Fee
• Servicer Earns a Fee
• Investor Earns a Return (Supposedly)
• Homebuyer Gets Hosed

7
Terms and Meanings

• Sub Prime Mortgage Borrower
• Borrower Has Poor Credit, Will Pay Higher Rate
• Mortgage Backed Securities
• Shares of a Pool of Mortgages Sold to Investors
• Carry High Rates of Interest for Investors
• Home Equity Loans
• Loans for the Difference Between Mortgage and
  Value of Home
• Foreclosures
• Borrower Takes Title to Home and Sells It to
  Repay Loan

8
The Housing Bubble

• House Prices Doubled Between 2000 and 2006
• Mortgage Backed Securities Tripled 1996-2007
• 7.3 Trillion Worth of MBS in Market in 2007
• Mortgage Market in 2008
• Banks 8 trillion
• Traditional Bond Holders 7 trillion
• Securitized Debt 10 trillion
• House Price Increases Moderated in 2006

9
Impact of Price Moderation

• Adjustable Rate Mortgages Began to Reset
• Borrowers Could Not Refinance
• Borrowers Could Not Afford Higher Payments
• Borrowers Went Into Default
• Lenders Began Foreclosing on Homes
• Prices Began To Fall
• Borrowers Had Negative Equity in Homes

10
Statisitics

• By 2008
• 9.2 of Mortgages Are Delinquent or in
  Foreclosure
• 8.8 Million Homeowners (10.8) Negative Equity
• Expected to be 12 million by 2009
• Unsold Homes Equal 9.8 Times Monthly Sales
• 4 Million Homes Are Unsold (2.9 Million Are
  Vacant)
• Foreclosure Proceedings on 2.3 Million Homes
• 7.5 Million Sub Prime Mortgages Worth 1.3
  Trillion

11
The Abuses

• Adjustable Rate Mortgages Enticed Buyers
• They Accounted for 80 of Sub Prime Mortgages
• Easy Credit Terms
• Little or No Due Diligence
• No Confirmation of Income
• NINJA Loans
• Mortgage Originators Misled Borrowers
• Credit Rating Agencies In Conflict
• Issue Credit Ratings on Mortgage Backed
  Securities
• Consult With Lenders on What Must Be Done To Get
  AAA

12
The Aftermath

• Housing Market Is Devastated
• Prices Are Down, Housing Starts Are Minimal
• Credit Markets Have Frozen
• Value of Investments Have Deteriorated
• Banks Have No Capital, Must Sell More Shares
• Companies Cannot Borrow
• Layoffs and Corporate Bankruptcies Highest
• Governments Are Trying To Stimulate Economy