SUB-PRIME MORTGAGE CRISIS

By:
Tiffany Kim
Jasmine Silvas
Justen Capers
Emmanuel Najera

Complex Financial Packages

Structured finance is a sector of finance that was
created to help transfer risk using complex legal and
corporate entities.
Subject to misunderstanding and/or
misunderstood
Not adequately distinguishing between structured
and corporate ratings

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Collateralized Debt Obligations: are made up of sections of
mortgage bonds, or mortgage-backed securities.
its a claim on payments from its thousands of
mortgages
Ranked from best to worst credit (tranches)
More risky for investors (bottom tranches) = Higher
Interest Rate
Safest for investors (top tranches)= Lower Interest
Rates
Default Credit Swaps: Investors who supplied money for
the loans
If defaulted, invertors would receive a great amount of
money (their form of interest)

9/11 Attack On American

Business
Often referred to as 9/11 , was a terrorist attack against

the US
Physical attack on US symbols of the economy and

military strength
Over 3,000 people killed , leading to major US initiatives

to combat terrorism

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Impact on US stock market
Impact on economic growth and consumer confidence
in form of spending
Impact on foreign direct investment in the US
Impact on fiscal policy

Predatory Loan Originators

Subprime borrowers taking more money
Lenders were collecting huge fees
Resold mortgages to New York investment houses
Idea of increase in real estate prices
Subprime borrowers owed more on their houses

Home Buyers
Subprime mortgages: terms of the credit bureau risk score (FICO) of
the borrower
In 2005, it was the peak level of activity in the Housing market
In 2006, the weakening market ended the price escalation
borrowers had assumed that home price increases would allow
them to
refinance their way out of onerous loan terms
Borrowers carry debt loads that exceeded the values of their homes

Due-Diligence Underwriter Fraud

DEF: Reasonable steps taken by a person in order to satisfy a
legal requirement, especially in buying or selling something.
Assessed the risk of buying loan portfolios
Misrepresenting the mortgages they packaged sold
Ex: loan would be defective but the underwriters would
tweak them to get approved
No proof of criminal intent, no one went to jail

Agency Fraud
Credit rating agencies provide global investors with an

informed analysis of the risk associated with debt

securities
The agent's sole source of revenue consists of fees paid

by the client
Securities is determined by: corporation, bank-created

entity, sovereign nation, or local government

VIDEO
https://www.youtube.com/watch?v
=bx_LWm6_6tA

Ethics
Agents were not ethical upon handing out loan
Originators were also not ethical because they never thought
of the final conditions to the home buyers
Due-diligences underwriters where making fun of applicants

Ethics
Government bailed out several banks and institutions
Whistle blowers

Solutions
Lowering federal funds
Bailouts
Programs to avoid home foreclosures
Increase transparency
More screening for credit loans

Works Cited
Ashcraft, Adam, and Til Schuermann. "Understanding the
Securitization of
Subprime Mortgage Credit." No. 318 (2008).
Federal Reserve Bank of New York Staff Reports. Web. 3 Dec.
2015.
Jackson, Olivia A. "The Impact of the 9/11 Terrorist Attacks on the
US Economy."The Impact of the 9/11 Terrorist Attacks on the US
Economy(2008): n. pag.Fmuniv.edu. Web. 4 Dec. 2015.
Kroft, Steve. "House of Cards: The Mortgage Mess."
Cbsnews.com. CBS News, 27
Jan. 2008. Web. 29 Nov. 2015.
Staff, CRF.org. "The Credit Rating Controversy." Council on
Foreign
Relations. Council on Foreign Relations, 19 Feb. 2015. Web.
03 Dec.
2015.

Works Cited
Utt, Ronald D. "The Subprime Mortgage Market Collapse: A
Primer on the
Causes and Possible Solutions. The Heritage Foundation.
N.p., 2015.
Web. 02 Dec. 2015
Wang, Dan. "How Are Collateralized Debt Obligations and Credit
Default Swaps Structured?" Medium. The Medium Corporation,
12 May 2014. Web. 4 Dec. 2015.