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3 US Economic Crisis Share

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3 US Economic Crisis Share
The US
Economic
Crisis

HiranJ
9 Oct 2008

Session content
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The sub prime market and sub prime crisis
Housing Mortgage Fraud
CDS – Easy money!
Wall Street in Turmoil
The bailout plan

The Sub Prime Market
• What is the sub prime market?
– Sub prime lenders
• Lends to borrowers that do not qualify for mainstream lending by FannieMae/FreddieMac
• Lending rates are usually high
• Has prepayment penalties
• One of the common lending terms is 2/28 ARM

The Sub Prime Market
• 2/28 ARM
• ARM – Adjustable Mortgage Rate
• First 2 years the rate is fixed, but higher than market rates • After 2 years the lender has the right to increase the rate considerably on a pre-agreed margin

The Sub Prime Market
• Sub prime borrowers
– Can not qualify for mainstream (or prime) lending due to various reasons
• Low creditworthiness
• Type of property to be mortgaged is not affordable with prime lending

– Most sub prime borrowers opt for the 2/28ARM hoping to improve their creditworthiness in the first 2 years and refinance their mortgage in the prime market

The Result
• Low income families could afford better housing! • Real estate market was booming!
• At the same time it increased people’s debt
• Created a pool of mortgages
• Created an opportunity to engineer financial instruments such as mortgage backed securities on sub prime mortgages

The Result
• However most people were unable to pay up the mortgage
• Created opportunity for criminals to make a quick buck

Mortgage Fraud
• Two types of mortgage fraud
– Fraud for property
– Fraud for profit

• Fraud for property
– Genuine borrowers seeking a loan to finance the purchase of a house
– Minor misrepresentation in the application such as hiding their current debt or embellishing their incomes
– Involved a single loan on the property
– Borrower intends to pay the loan

Mortgage Fraud
• Fraud for profits
– Profits are made in two ways
• Illegal property flipping
• Foreclosure rescue schemes

Mortgage Fraud
• Illegal
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