Download Slides

Britney Melcher
Greg Russo
Lyndsey Robison
Shawn Stormer




Began in 2007
Most severe of post- WWII era
Impacts on:
- The housing market
- Financial Institutions worldwide
- general economy
Result?
- deep global recession



Housing Bubble: characterized by rapid
increases in value of real estate.
Housing prices peaked in 2005 and started to
decrease in 2006.
Increased foreclosure rates in 2006-2007 led
to a major crisis in: subprime, Alt-A,
mortgage, credit, hedge fund, and other
financial institutions on a global scale.



In 2005-2006, about 1/3 of the mortgage
loans were for adjustable-rate mortgages
(ARM)
Borrowers extended mortgages that they
could not pay in the long run.
They were given loans with the expectation
that accumulating home equity would allow
refinancing into better mortgages.



Goals:
-meet federal (HUD) goals
- improve home ownership of low and
middle income families
Lending practices by Fannie Mae and Freddie
Mac shoehorned millions of people into
homes that they could not afford.
They are now owned by federal government.

Between 1997 and 2006
◦ Typical American house price increased 124%
◦ In 2006 prices began too decline, and still have not
hit rock bottom
◦ In December 2008, the Case-Shiller Home Price
Index reported its largest price drop in history.



2001- National median home price ranged
from 2.9 to 3.1 times the median household
income
2004- Rose to 4.0
2006- Rose to 4.6



1990-1995- Average 609,000 newly
constructed homes per year
2005- 1,283,000 newly constructed single
family homes sold
2005- Homeowners extracted $750 Billion of
equity from their homes
◦ Up from $106 Billion in 1996
◦ Spent 2/3 of it on personal consumption

2008- $900 Billion special loans and rescues
◦ Over half
 Fannie Mae
 Freddie Mac
 Federal Housing Network

December 24, 2009- Treasury Department
◦ Provide Fannie Mae and Freddie Mac unlimited
financial support for 3 years

Subprime lending refers to credit quality of
borrowers with weakened credit histories
◦ March 2007- Value of subprime mortgages was
$1.3 Trillion
◦ Over $7.5 Million first-lien subprime mortgages
outstanding
 Form of security interest granted



Created in 1937 under the FDR
administration
Current mission is to increase
homeownership, support community
development and increase access to
affordable housing free from discrimination.
Fannie Mae & Freddie Mac
◦ 1996, HUD set target for 42% of mortgages to be
issued to borrowers whose income was below the
median of the area.
◦ 2000, this number was raised to 50%


GSE’s (group of
financial service
corporations)
receive tax
incentives when
purchasing from
low income
borrowers.
Subprime
Mortgages –
mortgage
offered to
borrowers with
a greater-thanaverage risk of
defaulting on
the loan

Established in 1977 but strengthened in 1995
◦ Increased number of loans given to low and
moderate income families by 80%

Why?
◦ Pressure caused banks to serve poor regions of the
US
◦ Resulted in politicians pushing for increased home
ownership & urban development without
committing budgetary dollars.




$300 billion government initiative to
refinance troubled mortgages and boosts
oversight of Fannie Mae & Freddie Mac
Also provide government-backed mortgages
and get out from under risky mortgages
distressed homeowners can’t afford
Tax breaks for home buying
1st national licensing system for mortgage
brokers & loan officers

Program that allows US Treasury to purchase
or insure $24 trillion of troubled assets
◦ Illiquid difficult to value assets (foreclosed homes)
from banks & other financial institutions


Once housing stabilizes value is expected to
increase and both the banks and Treasury are
expected to profit
Encourage lending levels seen before crisis



Stabilize housing market by providing help to
7-9 million Americans by reducing monthly
mortgage payments
4-5 million with loans from Fannie Mae &
Freddie Mac opportunity to refinance
$75 billion to 3-4 million Americans for aid
to preventing more foreclosures






Detailed info about each program
Also self-assessment & calculators to
determine if an individual is eligible
Ability to connect with free counseling
resources for questions
Locate local homeowner events
Checklist of materials to have when
contacting about this program
FAQ from similar borrowers
•Housing
crisis moved beyond USA
•Canada
•England
•Spain
•Ireland
•Australia

Household debt is historically high

Obligatory Mortgage Insurance
◦ Insurance required for <20% down payment

Single-family housing sales increased
◦ 78% over 2009
◦ Due to fear of increase in interest rates

Houses estimated to be overvalued by 30%

Loaned money to risky investors
◦ Reacted to crisis in US by increasing interest rates

Housing prices have increased 300% since
1975

Housing prices more than tripled since 1997

Debt increasing 25% each year
◦ Interest rates are variable from year to year

Banking system well equipped
◦ Conservative laws
 Require high securities from potential borrowers
◦ Helped in the UK Banking Bailout

Increase in prosperity in the 90’s
◦ Caused many Irish citizens to move back to Ireland
◦ Further increased housing prices

Central Bank of Ireland
◦ Admitted houses overvalued by 60% (2005)

Liam Carrol, developer
◦ Unable to pay back loans
 1.3 billion euros

Debt to GDP ratio increased from 80% to
160% since 1994
◦ Inflation only rose 36%

Houses are overvalued by 18%

Government Oversight
◦ Regulate who loans can be given too

Focus on Economy
◦ Restoring jobs will increase demand in the housing
market


Reward Smart Investing
Bring prices back down to equilibrium
◦ Construction/Sale Prices


Restore Investor Faith
Conservative Banking Laws