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