Econ. Presentation
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Transcript of Econ. Presentation
Subprime Mortgage Crisis
Perspectives of FED and Households
Housing Price Bubble
Housing Market A
The Big Short B
Consequences C
Q & A D
Financial Crisis of 2007-2009
Myth Of Home ValuePart - A
Step 1 - Housing bubbles usually start with an increase in demand. (Speculators enter the market, further driving demand.)
Part - A
Part - C
Step 2- In the face of limited supply which takes a relatively long period of time to replenish and increase, prices go up.
Part - A
Part - C
Subprime Mortage CrisisThe expansion of household
debt
Part - B
↓
Initially offered attractive rates of return due to the higher interest rates on the mortgages; however, the lower credit quality ultimately caused massive defaults.
↓Mortgage-backed securities Collateralized debt obligations (CDO)
Ninja Loans:
A loan extended to a borrower with "no income, no job and no assets".
Liar Loans:
NINA features open the door for abuse when borrowers or their mortgage brokers or loan officers overstate income and/or assets in order to qualify the borrower for a larger mortgage.
Part - B
What's a CDO?
• Background :
-Originally developed for the corporate debt markets.
-Evolved to encompass MBS.
• Definition:
- An asset pool that is repacked into discrete tranches that can be sold to investors.
Part - B
US Intrest Rates Graph (1960 - 2010)Part - C
Part - B
Consequences:
1- Decrease in real GDP
Part - C
2 - Increase in Unemployment Rate
Part - C
Why such big decrease in real GDP?
• Synthetic CDOs -> Market for insuring mortage bond is x20 bigger than the actual mortages. (Credit Default Swaps)
• Private Tranches / Faulty Risk Profiles (Standard & Poor's)
Part - C
• Dr. Michael Burry - > Goldman Sachs
• Cornwall Capital
Part - C