MORTGAGE LOANS FINANCIAL CRISIS AND FIN 5333 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 dominated overall market. Larger Subprime Share Borrowers with modest income and marginal credit could purchase home with minimal down payment After Housing Bust: Government mortgages dominated overall market Larger Conforming and Government-Backed Share Default in subprime mortgage shocked private lenders. Before Housing Boom: Small Subprime Share

MARKET SHARES During Housing Boom: Private mortgages dominated overall market. Larger Subprime Share Borrowers with modest income and marginal credit could purchase home with minimal down payment After Housing Bust: Government mortgages dominated overall market Larger Conforming and Government-Backed Share Default in subprime mortgage shocked private lenders. Before Housing Boom: Small Subprime Share

MARKET SHARES During Housing Boom: Private mortgages dominated overall market. Larger Subprime Share Borrowers with modest income and marginal credit could purchase home with minimal down payment After Housing Bust: Government mortgages dominated overall market Larger Conforming and Government-Backed Share Default in subprime mortgage shocked private lenders. Before Housing Boom: Small Subprime Share

MARKET SHARES During Housing Boom: Private mortgages dominated overall market. Larger Subprime Share Borrowers with modest income and marginal credit could purchase home with minimal down payment After Housing Bust: Government mortgages dominated overall market Larger Conforming and Government-Backed Share Default in subprime mortgage shocked private lenders. Before Housing Boom: Small Subprime Share

MARKET SHARES During Housing Boom: Private mortgages dominated overall market. Larger Subprime Share Borrowers with modest income and marginal credit could purchase home with minimal down payment After Housing Bust: Government mortgages dominated overall market Larger Conforming and Government-Backed Share Default in subprime mortgage shocked private lenders. Before Housing Boom: Small Subprime Share

DEFAULT RATES Fed Fund Rate and 1-Year ARM CauseLinkage Result Linkage: Most ARM’s interest rate benchmark is closely tied to the Fed Fund rate since mid mid 2004 Problematic Years Interest Rate (%) Year Borrowers During Mid Mid 2004 They prefer ARM to FRM. 1 37% of Mortgage Markets is Subprime. 2 ARM FRM

CIRCLE OF HOUSING BUST Mortgage Default Foreclosure & Housing Fire Sales House Price goes down More Borrower in negative home equity The Circle of Housing Bust So more Mortgage Default

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