The Housing Market Crash 2006 What happened?

Selling price More or Less GROUP/MARKET B   House Original Asking Price Period 1 Sale Price Period 3 Period 7 Period 8 Selling price More or Less Seller #1 $345,000 $600,000 $500,000 $520,000 $510,000 More Seller #2 $352,000 $1,000,000 $700,000 $372,000

GROUP/MARKET B 2 Homes/Sellers 4 Buyers

Selling price More or Less GROUP/MARKET A   House Original Asking Price Period 1 Sale Price Period 3 Period 7 Period 8 Selling price More or Less Seller #1 $345,000 No Sale $330,000 $291,000 Less Seller #2 $352,000 $300,000 $322,000 $100,000 Seller #3  $343,000 Seller #4 $348,000 $305,000 $55,000 $315,000 $338,000

GROUP/MARKET A 4 Homes/Sellers 2 Buyers

GO DOWN GO UP Many sellers Few Buyers Prices Many Buyers Few Sellers

What does the mortgage lender do? Check credit score Check your income Check your savings

CREDIT SCORE 1. Do you pay your bills on time? 2. How much debt do you have?

INCOME DO YOU MAKE ENOUGH MONEY EACH MONTH TO MAKE THE MONTHLY INSTALLMENT PAYMENT?

SAVINGS DO YOU HAVE ENOUGH MONEY TO MAKE A DOWN PAYMENT AND PAY FOR OTHER COSTS RELATED TO BUYING A HOUSE?

Purchase Price $380,000

BUYER #1 Credit Score 755 Income $150,000 Savings $85,000 (20% down payment)

BUYER #2 Credit Score 590 Income $50,000 Savings $5,000 (0% down payment)

BUYER #3 Credit Score 725 Income $100,000 Savings $40,000 (10% down payment)

BUYER #4 Credit Score 655 Income $85,000 Savings $10,000 (2% down payment)

WHY SHOULD A LENDER BE CAREFUL WHEN LENDING MONEY FOR MORTGAGES? In a “normal” market banks only make money if the borrower pays the money back. It costs banks a lot of money to foreclose on a home.

HOW DOES THE LENDER BENEFIT FROM LENDING THIS MONEY TO YOU? Principal loan amount $380,000 Interest paid over 30 years: $354,32.20 Total payments $734,321.20

NINA Loans “No income/No asset” verification If the banks are now willing to lend money without verifying income and assets, how many borrowers will be approved for a loan? What does that do to the housing market?

Why would a lender be willing to lend without looking at all the relevant information? The mistaken belief that home prices would never go down. Lender A found a way to sell the mortgages and still make money.

HOW? LENDER 1 loans money to 10 people to buy homes. Lender makes money on fees charged to the buyers. LENDER 2 offers to buy all of LENDER 1’s MORTGAGE LOANS. LENDER 1 does not care if those 10 people can actually pay back the loans.

WHY? Wall Street created a market for mortgages that could not survive. Government made it easier for banks to loan more money. People bought homes they could not afford.