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U.S.

Subprime Mortgage Crisis

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Subprime Mortgage Crisis

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

Subprime Borrowers

For poor credit history


Limited income

Subprime Lenders

Greater risks
High returns

New Model of Mortgage Lending

Source: BBC News

Causes of the Crisis

The Housing Downturn

Excess supply of home inventory


Sales volume of new homes dropped
Reduced market prices (10.4% 12/06-12/07)
Increasing foreclosure rates

Borrowers

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

Causes of the Crisis

Financial Institutions

Attraction from high returns


Offered high-risk loan and incentives
Believes that will pass on the risk to others

Securitization

Mortgage backed securities


Risk readily transferred to other investors
From 54% in 2001 to 75% in 2006

Causes of the Crisis

Government and Regulators

Community Reinvestment Act, encourages the


development of the subprime debacle
Glass-Steagall Act contributes to the subprime crisis
(FDIC back up)

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

Direct Impacts of the Crisis

Stock Market

08/15/07 Dow Jones had dropped below 13,000 from


Julys 14000
First 3 weeks of 08, the Dow Jones Industrial
Average fell 9%
1/18/08 Dow Jones/0.5%, S&P 500/0.6%, and
NASDAQ/0.3%
01/21/08 (black Monday) the worlds biggest falls
since Sept. 11, 2001

Direct Impacts of the Crisis

Financial Institutions Bankruptcy

New Century Financial (USA) Apr. 2, 2007


American Home Mortgage (USA) Aug. 6, 2007
Sentinel management Group (USA) Aug. 17, 2007
Ameriquest (USA) Aug. 31, 2007
NetBank (USA) Sept. 30, 2007
Terra Securities (Norway) Nov. 28, 2007
American Freedom Mortgage Inc. (USA) Jan. 30, 2007

Direct Impacts of the Crisis

Financial Institutions Write-Downs

Citigroup (USA) - $24.1 bln


Merrill Lynch (USA) - $22.5 bln
UBS AG (Switzerland) - $16.7 bln
Morgan Stanley (USA) - $10.3
Credit Agricole (France) - $4.8 bln
HSBC (United Kingdom) - $3.4 bln
Bank of America (USA) - $5.28 bln
CIBC (Canada) 3.2 bln
Deutsche Bank (Germany) - $3.1 bln

By 02/19/08 losses or write-downs > U.S. $150 bln


Be expected exceeding $200 - $400 bln

Global Impacts of the Crisis

Investors will be very cautious to act

Consumer spending will slowdown

Lack of cash or unwilling to spend

World economy may slip into recession

Lack confidence in stock/bound market

U.S. economy condition will affect global economy

GDP growth will be low

Lose businesses
Lose jobs
Economy slow down

Global Impacts of the Crisis

Financial market

Unemployment rate may be high

May take long time to recover


Slow economy increase unemployment rate

Exports will decrease in China, Korea, Taiwan

GDP growth heavily depends on export

Government and Central Banks Actions

08/2007, President Bush announced Hope New Alliance


02/13/08, President signed a tax rebates of $168 bln
09/18/07, the Fed dropped rate point
10/31/07, point cut by Fed
12/11/07, point cut by Fed
01/22/08 the Fed slashed the rate by 3/4 points to 3.5%
01/30/08 another cut of 1/2 points to 3%
Central Banks have pumped billions of dollars to banks
Central Banks of the world have done the same thing

Forecasting

Two Different Opinions:

1.

The crisis wont affect global economy deeply


The crisis will lead the global economy to recession

2.

Alan Greenspan stated: The current credit crisis will


come to an end when the overhang of inventories of
newly built homes in largely liquidated, and home price
deflation comes to an end . . . After a period of
protracted adjustment, the U.S. economy, and the world
economy more generally, will be able to get back to
business.

Thank You!

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