MORTGAGE LOANSFINANCIAL

CRISIS

ANDFI

N

53

33

THEERADEJ SUABTRIRAT ANH NGUYEN SUKIT THAOWAN

OVERVIEW

• Four Types of Mortgage Loans

• Mortgage Market Shares

• Default Rates

• The Circle of Housing Bust

Jumbo mortgage

• Private lenders• Higher interest rate• For buying a big, luxury house

Conforming mortgage

• Must meet Fannie Mae & Freddie Mac’s Guideline• Have four basic requirements

Subprime mortgage• Less desirable

characteristic• Generally considered to have higher credit risk• Credit quality judged by the FICO credit score

Government-backed Mortgage• Considered

government’s subprime• For FHA/VA Qualified Borrowers• For low-income borrowers to buy a small home• No Down Payment, long time to repay

MORTGAGE MARKET

MARKET SHARES

During Housing Boom:

Private mortgages dominatedoverall market.

Larger Subprime Share

Borrowers with modest income and marginal credit could purchase home with minimal down payment

Subprime; 37.00%

Conforming; 24.00%

Government-backed; 4.00%

Jumbo and Others; 35.00%

2006

After Housing Bust:

Government mortgages dominated overall market

Larger Conforming and Government-Backed Share

Default in subprime mortgage shocked private lenders.

Subprime; 3.00%

Conforming; 60.00%

Government-backed; 17.00%

Jumbo and Others; 20.00%

2008

Before Housing Boom:

Small Subprime Share

Subprime; 12.00%

Conforming; 43.00%Government-backed; 7.00%

Jumbo and Others; 38.00%

2002

MARKET SHARES

During Housing Boom:

Private mortgages dominatedoverall market.

Larger Subprime Share

Borrowers with modest income and marginal credit could purchase home with minimal down payment

Subprime; 37.00%

Conforming; 24.00%

Government-backed; 4.00%

Jumbo and Others; 35.00%

2006

After Housing Bust:

Government mortgages dominated overall market

Larger Conforming and Government-Backed Share

Default in subprime mortgage shocked private lenders.

Subprime; 3.00%

Conforming; 60.00%

Government-backed; 17.00%

Jumbo and Others; 20.00%

2008

Before Housing Boom:

Small Subprime Share

Subprime; 12.00%

Conforming; 43.00%Government-backed; 7.00%

Jumbo and Others; 38.00%

2002

MARKET SHARES

During Housing Boom:

Private mortgages dominatedoverall market.

Larger Subprime Share

Borrowers with modest income and marginal credit could purchase home with minimal down payment

Subprime; 37.00%

Conforming; 24.00%

Government-backed; 4.00%

Jumbo and Others; 35.00%

2006

After Housing Bust:

Government mortgages dominated overall market

Larger Conforming and Government-Backed Share

Default in subprime mortgage shocked private lenders.

Subprime; 3.00%

Conforming; 60.00%

Government-backed; 17.00%

Jumbo and Others; 20.00%

2008

Before Housing Boom:

Small Subprime Share

Subprime; 12.00%

Conforming; 43.00%Government-backed; 7.00%

Jumbo and Others; 38.00%

2002

MARKET SHARES

During Housing Boom:

Private mortgages dominatedoverall market.

Larger Subprime Share

Borrowers with modest income and marginal credit could purchase home with minimal down payment

Subprime; 37.00%

Conforming; 24.00%

Government-backed; 4.00%

Jumbo and Others; 35.00%

2006

After Housing Bust:

Government mortgages dominated overall market

Larger Conforming and Government-Backed Share

Default in subprime mortgage shocked private lenders.

Subprime; 3.00%

Conforming; 60.00%

Government-backed; 17.00%

Jumbo and Others; 20.00%

2008

Before Housing Boom:

Small Subprime Share

Subprime; 12.00%

Conforming; 43.00%Government-backed; 7.00%

Jumbo and Others; 38.00%

2002

MARKET SHARES

During Housing Boom:

Private mortgages dominatedoverall market.

Larger Subprime Share

Borrowers with modest income and marginal credit could purchase home with minimal down payment

Subprime; 37.00%

Conforming; 24.00%

Government-backed; 4.00%

Jumbo and Others; 35.00%

2006

After Housing Bust:

Government mortgages dominated overall market

Larger Conforming and Government-Backed Share

Default in subprime mortgage shocked private lenders.

Subprime; 3.00%

Conforming; 60.00%

Government-backed; 17.00%

Jumbo and Others; 20.00%

2008

Before Housing Boom:

Small Subprime Share

Subprime; 12.00%

Conforming; 43.00%Government-backed; 7.00%

Jumbo and Others; 38.00%

2002

DEFAULT RATES

Fed Fund Rate and 1-Year ARM 2000-2007

The fed fund rate took a steep raise in 2005-2006

1-Year ARM went higher

ARM & Subprim

e Borrowes went

into Default

Cause Linkage Result

Linkage: Most ARM’s interest rate benchmark is closely tied to the Fed Fund rate since mid 2002- mid 2004

Problematic Years

Interest Rate (%)

Year

Borrowers During Mid 2002 - Mid 2004

They prefer ARM to FRM.1

37% of Mortgage Markets is Subprime.2

ARM

FRM

CIRCLE OF HOUSING BUST

MortgageDefault

Foreclosure & Housing Fire Sales

House Price goes down

More Borrower in negative home equity

The Circle of Housing Bust

So more MortgageDefault

QUESTION ?