bubble spotting - subprime mortgage crisis / housing bubble 2007-2008

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BUBBLE SPOTTING SERIES - 2014

This short presentation on the Housing Bubble / Subprime crisis

forms part of a larger series of presentations on Market Bubbles

Front page graphic - www.dailyfresher.com

American Economic growth started

deteriorating in the 2000’s, and was

further negatively impacted by the

after-effects of the Sept 2001 attacks.

In an attempt to stimulate the

economy, the Federal Reserve lowered

interest rates down from 6.5% to 1%

(the lowest rate in 45 years) BY 2003.

BACKGROUND

www.buildingscheme.com

In 2002 the US Government launched

an initiative to increase home

ownership under Minority groups by

way of TAX CREDITS, SUBSIDIES and a $

440 BILLION COMMITMENT.

SUBSEQUENTLY INCENTIVES WERE

ADDED.

www.buildingscheme.com

Through Fannie May and Freddie Mac

(its government sponsored

enterprises), credit standards

deteriorated from 2004 onwards,

resulting in many more loans being

given to higher-risk borrowers, or

individuals who would not have been

considered credit worthy in

accordance with traditional standards

(this was the so-called SUB-PRIME

sector).

Net Capital rules were also suspended

for some banks.

Financial role players, such as banks,

repackaged these loans, mixing and

combining good quality loans with sub-

prime loans, which were then sold off

(securitisation) as financial products

(mortgage-backed securities) to

investors (Banks, Pension funds,

Schools, International Corporate

investors etc.).

These investment products were

complex, had different payment

tranches and different rights

depending which type of investment an

investor bought into. In all probability

very few investors fully understood

what they were buying into.

Due to cheap finance, and deteriorating

credit standards, many individuals now

took out relatively cheap adjustable

rate mortgages which they otherwise

would not have been able to afford.

Between 2000-2006 national housing

prices increased ± 9 % PA — and in

excess of 20% in some overheated

regions. Some home owners refinanced

and took 2nd bonds up to the revised

property value, cashing in on the

difference.

www.milkeninstitute.org/pdf/riseandfallexcerpt.pdf

Many of these loans were on

predatory terms.

Sub-prime home mortgage originations

increased dramatically, from 8%

(2001) to 21 % (2005). by 2006, 80% of

these subprime loans were repackaged

into and sold off to investors as

mortgage backed securities.

All kinds of new financial products

were developed during this period.

Furthermore many banks simply took

on too many bad loans.

New loans issued increased from $500

billion in 1990 to $2.4 trillion IN 2007.

From 2005, interest rates increased.

Due to speculation, housing inventory

increased, which resulted in a price

reduction.

Due to decreasing prices, numerous

mortgaged Homes were now worth

less than the outstanding debt on

these properties.

Many (sub-prime) owners were unable

to refinance the balance, and the

house was repossessed. In some

states, home owners simply walked

away.

Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States

This lead to an excess of available

property inventory, further dropping

the price.

At the same time, due to reduced

repayments being received, many

banks’ already compromised capital

levels were being depleted.

Business Insider.com

In early 2007, 25 sub-prime lenders

declared bankruptcy, announced

substantial losses, or put themselves

up for sale.

In late 2008, both Fannie Mae

and Freddy Mac reported

insolvency.

The US Treasury bailed out certain

banks, but not others. Interest rates

were lowered again.

A Fiscal stimulus package (and toxic

asset relief program- TARP) was put in

place. Regulations were amended, Acts

passed, Home Owner assistance

implemented.

A World wide credit crunch starts

kicking in as many international banks

one after the other discover that

their investment portfolios had

subprime exposure.

* (Pledges vs

actual expenditure

estimates still

differ hugely).

the Housing Bubble and Debt Crisis was

a significant force behind the 2008–

2012 global recession and a key

contributor to the European

Sovereign-Debt Crisis.

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Sub-prime crisis / housing bubble

http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

http://www.milkeninstitute.org/pdf/riseandfallexcerpt.pdf

http://www.oecd.org/finance/financial-

markets/40451721.pdf

http://www.slideshare.net/robinthieu/subprime-mortgage-

crisis-2008-presentation-646026

http://www.slideshare.net/amarranu/sl-vs-subprime-final

http://money.cnn.com/news/storysupplement/economy/bail

outtracker/

http://www.bloomberg.com/apps/news?pid=newsarchive&sid

=aZchK__XUF84

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

http://www.nytimes.com/interactive/2009/02/04/business

/20090205-bailout-totals-graphic.html?_r=0

http://www.conservapedia.com/Financial_Crisis_of_2008

http://online.wsj.com/news/articles/SB10001424127887324

059704578473310943230002

http://money.cnn.com/news/storysupplement/economy/bail

outtracker/

http://www.investopedia.com/articles/07/housing_bubble.as

p

http://economistsview.typepad.com/economistsview/

2009/07/what-caused-the-housing-bubble.html

The Journal of Business Inquiry

http://www.uvu.edu/woodbury/jbi/volume8/journals/

SummaryofthePrimaryCauseoftheHousingBubble.pdf

http://online.wsj.com/news/articles/SB1238112257164

53243

http://www.frbsf.org/education/publications/doctor-

econ/2002/january/federal-funds-discount-rate-2001

http://www.imf.org/external/np/seminars/eng/2012/

fincrises/pdf/ch12.pdf

http://www.ritholtz.com/blog/2011/12/bailout-total-

29-616-trillion-dollars/

http://www.conservapedia.com/Financial_Crisis_of_20

08

http://topinfopost.com/2013/12/18/700-billion-bank-

bailout-was-a-lie-it-was-secretly-7-trillion

This presentation is provided in the sake of public interest, and has been compiled based on

publically available information sources on the web.

While great care has been taken in the preparation and compilation of information indicated here,

the author does not accept any legal or other liability for any inaccuracy, mistake, misstatement or

any other error of whatsoever nature contained herein.

This presentation is not investment advice, not a solicitation for any type of investment, financial

or otherwise, nor is this presentation an opinion expressed on, nor endorsement of markets,

commodities or investments.

Any names, trademarks and images are copyright their respective owners and rights in the

graphic artwork and photos used in this presentation belongs to, and are courtesy of the

respective owners thereof. Unless where otherwise indicated, I don’t claim to have any rights

therein.