The Subprime Mortgage Crisis a.k.a. The Great Recession

The Subprime The Subprime Mortgage Mortgage

CrisisCrisisa.k.a. The Great a.k.a. The Great

RecessionRecessionThe Greatest Recession Powerpoint Ever!The Greatest Recession Powerpoint Ever!

What are subprime What are subprime mortgages?mortgages? A subprime mortgage is a type of A subprime mortgage is a type of

loan granted to individuals with poor loan granted to individuals with poor credit histories (typically below 600), credit histories (typically below 600), who would not be able to qualify for who would not be able to qualify for conventional mortgages. conventional mortgages.

Subprime mortgages charge interest Subprime mortgages charge interest rates that are above the typical rates that are above the typical interest rate because of the risk that interest rate because of the risk that is involved on the part of the lender. is involved on the part of the lender.

There are several different types of There are several different types of subprime mortgages, but the most subprime mortgages, but the most common is the adjustable rate common is the adjustable rate mortgage (ARM). mortgage (ARM).

ARMs can be misleading to subprime ARMs can be misleading to subprime borrowers because they initially pay a borrowers because they initially pay a lower interest rate then the rate goes lower interest rate then the rate goes up after some time. up after some time.

Some statistics of the housing Some statistics of the housing bubblebubble

Between 1997 and Between 1997 and 2006, the price of the 2006, the price of the typical American house typical American house increased by 124%increased by 124%

The housing bubble The housing bubble resulted in quite a few resulted in quite a few homeowners homeowners refinancing their homes refinancing their homes at lower interest rates. at lower interest rates. USA household debt as USA household debt as a percentage of annual a percentage of annual disposable personal disposable personal income was 127% at income was 127% at the end of 2007, versus the end of 2007, versus 77% in 1990.77% in 1990.

"The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system."

International Monetary Fund, World Economic Outlook, April 2008

And then the bubble burst…

If a person could not sell their home, this ultimately left the If a person could not sell their home, this ultimately left the homeowner with one option, and that was to DEFAULT. homeowner with one option, and that was to DEFAULT.

If the defaulted loan isn’t taken care of in a given amount If the defaulted loan isn’t taken care of in a given amount of time, the bank resumes responsibility of the home and of time, the bank resumes responsibility of the home and is put up for auction. is put up for auction.

The bank usually sells the home at a price that is much The bank usually sells the home at a price that is much lower than what it is worth. lower than what it is worth.

The process of auctioning off these houses creates a The process of auctioning off these houses creates a increase in supply of homes in the market, which will increase in supply of homes in the market, which will decrease the home prices.decrease the home prices.

The Subprime Mortgage Crisis The Subprime Mortgage Crisis Explained: Explained:

One of the major problems that One of the major problems that came out of this crisis was came out of this crisis was that:that: Billions Billions of dollars were of dollars were lost in mortgage backed lost in mortgage backed securities.securities.

What is a mortgage backed What is a mortgage backed security? “Once a bank has security? “Once a bank has made thousands of mortgage made thousands of mortgage loans, they often package up loans, they often package up all the loans together and sell all the loans together and sell them to investors as bonds.” them to investors as bonds.”

It was believed that these It was believed that these bonds were very safe bonds were very safe investments due to the fact investments due to the fact that home prices were on the that home prices were on the rise. If an individual was rise. If an individual was unable to pay the mortgage, it unable to pay the mortgage, it was thought that the homes was thought that the homes would easily just be seized and would easily just be seized and sold. sold.

The Subprime Mortgage Crisis The Subprime Mortgage Crisis Explained:Explained:

The AftermathThe Aftermath There was a total of 2.2 million There was a total of 2.2 million

foreclosures in 2007, up 75% from foreclosures in 2007, up 75% from the roughly 1.26 million RealtyTrac the roughly 1.26 million RealtyTrac reported in 2006. RealtyTrac said 1% reported in 2006. RealtyTrac said 1% of all US households were in 'some of all US households were in 'some stage of foreclosure' in 2007, up from stage of foreclosure' in 2007, up from 0.58% in 2006.0.58% in 2006.

By the end of 2008, home prices had By the end of 2008, home prices had dropped 20% from their 2006 peak.dropped 20% from their 2006 peak.