Presented by:

Aditya Laksmana Bima Ruditya Estie Nurina Hanif Widyanto Inge Aliwarga

US SUBPRIME MORTGAGE CRISIS

SUBPRIME MORTGAGE explained

A type of mortgage that is normally made out to borrowers (prospective homeowners) with lower credit ratings
Interest rate charged is higher than a conventional mortgage

Risk is reduced through credit enhancement

Requires additional collateral, insurance, or other third party agreements Compensation for lender in case the borrower defaults

CREDIT ENHANCEMENT explained

credit risk decreases
borrowers credit rating goes up false image of good credit (AAA)

CREDIT ENHANCEMENT
Loan Loan

TRUSTEE
Special Purpose Vehicle

mechanism

Reference Portfolio
ABS ABS ABS

Securities
AAA AA A BBB

CDS
CDS CDS Other CDOS

Bond
Bond

BB+ or <

New model of Mortgage Lending

Normal Default

US Subprime Mortgage Crisis

KEY EVENTS
leading to the crisis

SUBPRIME MORTGAGE CRISIS

{ Set of events leading to FINANCIAL CRISIS and RECESSION in 2008 }
Brief Timeline
Sharp rise in home foreclosures in late 2006 Only 9% in 1996, 13% in 1999, 20% in 2006 $1.3 Trillion subprime mortgage as of March 2007 The delinquency rate had risen to 21% by 2008

1)

Housing price increase during 2000-2005 followed by levelling off and price decline
Index, January 1987 = 100 600 500 400 300 200 100 0
OFHEO conventional and conforming home price index S&P/Case-Shiller home price index

Home prices peak in 2006

California median home price

19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08

Annual Existing House Price Change

Source: www.standardpoors.com, S and P Case-Schiller Housing Price Index.

2)

Increase in the default and foreclosure rates

Increasing sharply in Q3 2006 and reached 5.2% in Q3 2008
Default Rate

Source: mbaa.org, National Delinquency Survey.

Foreclosure Rate
In Q3 2008, housing prices were 25% below 2006 peak

Source: www.mbaa.org, National Delinquency Survey.

3)

Collapse of major investment banks and stock prices in 2008

Stock returns were down 37% in 2008 compared to previous year S and P 500 Total Return

Source: www.standardpoors.com

US Subprime Mortgage Crisis

MAJOR CAUSES
Why it happened?

one.

MAJOR CAUSES Why it happened?

The Housing Downturn

Excess supply of home inventory Sales volume of new homes dropped Reduced market prices Increasing foreclosure rates

The Borrowers
Difficulties in re-financing Begin to default on loans Walk away from properties Fraudulent misrepresentations

two.

Financial Institutions
Attraction from high returns Offered high-risk loan and incentives Believes they will pass on the risk to others

three.

MAJOR CAUSES Why it happened?

Mortgage-backed securities (MBS) Risk readily transferred to other investors From 54% in 2001 to 75% in 2006

Securitization

four.

MAJOR CAUSES Why it happened?

Government & Regulators
Community Reinvestment Act, encourages the development of the subprime debacle Deregulation of Glass-Steagall Act contributes to the subprime crisis The Feds manipulation of (low) interest rates during 2002-2006

Central banks

Less concerned with avoiding asset bubbles React after bubbles burst to minimize the impact No determination on monetary policy Institutions risk more because of Feds rescue

IMPACT
Crisis Aftermath

Global Impact
Investors will be very cautious to act Lack confidence in stock/bound market Consumer spending will slowdown Lack of cash or unwilling to spend World economy may slip into recession U.S. economy condition will affect global economy

Crisis Aftermath
GDP growth will be low Lose businesses Lose jobs Economy slow down

IMPACT

Financial market May take long time to recover

Unemployment rate may be high Slow economy increase unemployment rate

Exports will decrease in China, Korea, Taiwan GDP growth heavily depends on export

Mortgage-based Securities
in Indonesia
In Indonesia, MBS is also known as Kontrak Investasi Kolektif Efek Beragun Aset (KIK-EBA)

Crisis Aftermath

IMPACT

Total KPR Value worth Rp 240 Trillion in 2013

The arrangement is done by Otoritas Jasa Keuangan through the enactment of OJK Regulation No. IX.K.1
KIK-EBA in Indonesia:
Nama EBA EBA-DBTN 01 Tahun Penerbitan 2010 Pokok (Kelas A) 688.500 Juta Tingkat Bunga 9,25% p.a. BI Rate 6,25%

EBA-DBTN 02
EBA-DBTN 03

2011
2012

645.000 Juta
925.000 Juta

8,75% p.a.
7,75% p.a.

6%
5,75%

Mortgage-based Securities
in Indonesia

Crisis Aftermath

IMPACT

Mortgage-backed Securities

Crisis Aftermath

Risks of MBS in Indonesia

+ + + + + +
Geographical concentration of assets

Crisis Aftermath

IMPACT

Credit risks and loss related with the fall of property values

Risks associated with the increase of interest rate

Liquidity risks of Mortgage-backed Securities

Legal Risks
Operational risks in the implementation of investment managers activities, custodian bank, and service provider

THANK YOU!