Assignment for next week Each – pick a country Research what that country is doing to remedy problems raised by financial crisis. EXTRA CREDIT: prepare a synopsis of what you find. One page – bullet points! OFFICE: Rm [First Floor of this Building] Ofc. Hrs?

Couple of misc. concepts before moving on… Escrow: HYPOTHETICAL: Seller owns an apartment bldg. – FMV = $3 mill. Lender #1: 1 st mortgage with = $1 million (bal. due) Lender #2: 2 nd mortgage = $400,000 (bal. due) Judgment recorded vs. X in amt. of $100 k Buyer - contracts to buy X’s bldg. for $3 million.

Escrow opens Buyer will borrow $2.3 million from Wells Fargo Bank. What does Buyer ultimately want? What does Wells Fargo want? How will Wells Fargo gets what it wants? What will happen to Lender #1 and #2? Lender #1: 1 st mortgage with = $1 million (bal. due) Lender #2: 2 nd mortgage = $400,000 (bal. due) Judgment recorded vs. X in amt. of $100 k

ESCROW INSTRUCTIONS Pgs of materials Duty of escrow officer Ultimate result: Title Insurance Policy

The Global Financial Crisis Impact on other countries

What did you learn from the assignment for today? This American Life: (2008) Giant Pool of Money –or- some other program?

Secondary mortgage market - pg. 49 What is it? Why does it exist? Mortgages sold by originators Packaged into mortgage-backed securities Sold to investors

Four major participants in Secondary Mtg. Market Who are they? Mortgage originator Aggregator: large mortgage originators with ties to Wall Street firms and government-sponsored enterprises (GSEs), like Fannie Mae and Freddie Mac.Fannie MaeFreddie Mac Securities dealer: Most Wall Street brokerage firms have MBS trading desks. Investor

Mortgage Backed Securities (MBS) STEPS (Investopedia): Real estate buyers borrow from financial institutions. Financial institutions sell mortgages to MBS entities. MBS entities form mortgage pools. Individuals invest in mortgage pools.

Types of MBS Pass-through or participation certificate – Direct ownership in pool of mortgages – Get pro rata share of all pymts made – Prepayment – affects yield Collateralizated Mortgage Obligation (CMO) – Pools of pass-through mortgages: Pass-Through Securities CMO Issuer Individual Investors Pass-through or participation certificate – Direct ownership in pool of mortgages – Get pro rata share of all pymts made – Prepayment – affects yield Collateralizated Mortgage Obligation (CMO) – Pools of pass-through mortgages: Pass-Through Securities CMO Issuer Individual Investors

Sequential Pay Collateralized Mortgage Obligation (CMO) CMO issuers - distribute cash flow to bondholders from a series of classes, called tranches.tranches Each tranche holds mortgage- backed securities with similar maturity and cash flow patterns.cash flow CMO issuer – 1 st pays stated coupon interest rate to bondholders in each tranche. Principal payments go first to the investors in the first tranches. Once they are paid off, investors in later tranches will receive principal pymts.

Who are the investors in Mortgage Backed Securities? Foreign governments Pension Funds Insurance Companies Banks Hedge Funds – sophisticated investors – U.S. – must be accredited (certain income/net worth) – Speculative investments/large risk

Housing bubble burst – 2006/2007 Value of securities tied to U.S. Real Estate Qs re/ bank solvency, credit availability, Investor confidence Caused global stock markets to plummet 2008/2009 Credit – tightened; trade slowed

Example: BNP Paribas Aug. 9, 2007: "a complete evaporation of liquidity", blocked withdrawals from three hedge funds. The significance of this event was not immediately recognized but soon led to a panic as investors and savers attempted to liquidate assets deposited in highly leveraged financial institutions.

BNP Paribas is one of the world's largest global banking groups, headquartered in Paris, with its second global headquarters in London. global bankingParis London In 2012, BNP Paribas was ranked by Bloomberg and Forbes as the fourth largest bank in the world, as measured by total assets. BloombergForbeslargest bank

CREDIT DEFAULT SWAP (AIG) Explain Insured obligations of fin. institutions AIG received premium in exchange for promise to pay $ to party A if party B defaulted U.S. govt. had to bail it out – taxpayers provided over $180 billion to AIG (2008/09)