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Han Kyul Lee

Economists Brace for Worsening Subprime Crisis : NPR - 1 views

www.npr.org/...story.php

'ARM adjustable-rate mortgage homeownership

shared by Han Kyul Lee on 13 Jan 11 - No Cached
  • lenders repurposed "creative financing" products that had previously been marketed to high-income borrowers seeking flexibility with their money. Among the most popular were variations on the adjustable-rate mortgage, or ARM.
  • ARMs are loans whose interest rates adjust up or down periodically. The initial rate is typically fixed for a period of two or three years. The benefit is that the starter rates are lower for ARMs than for traditional, fixed-rate mortgages. That means lower monthly payments, making homeownership more affordable and allowing borrowers to qualify for a bigger loan.
  • payment-option loans
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  • interest-only
  • With the former, a borrower only pays the interest on the loan — not the principal balance — during the introductory period.
  • With payment-option ARMs, borrowers get to choose how much they pay each month: enough to cover the interest plus the principal, the interest only... or less than the interest. In that last scenario, the unpaid interest is tacked on to the principal, leaving borrowers owing more than the amount of the original loan.
  • Han Kyul Lee on 13 Jan 11
     
    Lenders created variations on the adjustable-rate mortgage to attract a growing pool of borrowers, especially homeowners. Adjustable-rate mortgages have interest rates that adjust up or down periodically, with a fixed rate for a period of two to three years. The starter rates are lower than the traditional starter rates, which makes homeownership more affordable and borrowing more easier.
Han Kyul Lee

America's foreclosure plan: Can't pay or Won't pay? | The Economist - 0 views

www.economist.com/...13145239

the financial crisis economics homeownership barack obama mortgages

shared by Han Kyul Lee on 10 Jan 11 - No Cached
  • Is it that homeowners cannot afford to pay; or is it that they are declining to do so, because their homes are now worth less than their mortgages, the phenomenon known as negative equity?
  • One school thinks that, even in cases of negative equity, most homeowners will not default if they can afford the payments—not least because defaulting will wreck their credit records.
  • A second school believes that once the home is worth less than the mortgage, homeowners have a significant incentive to walk away even if they can make the payment, since in many states lenders cannot then pursue them for the shortfall.
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  • If negative equity is the real problem, principal will have to be reduced to stem the foreclosures. But lenders are reluctant: they worry that many homeowners who can afford their payments will choose to default, or that investors in the loans will sue them. With house prices still falling, many borrowers would soon have negative equity again.
  • Han Kyul Lee on 10 Jan 11
     
    Published February 19, 2009 Notes - Barack Obama pledges $75 billion to reduce the mortgage payments of homeowners at risk of default - A previous effort by George Bush, whose first plan was to help up to 240,000 subprime borrowers refinance their debts into goverment-backed, fixed-rate mortgages, resulting in only 4000 doing so - A Democrat-inspired plan of $300B to guarantee up to 400k mortgages only attracted 517 applications, since lenders were bugged because they had to first write down the principal - This is an issue of whether homeowners cannot afford to pay, or that they refuse to pay, since now their homes are worth less than their mortgages - Economists divide up their opinions - First school: even in cases of negative equity, most homeowners will not default should they be able to afford the payments - Second school: once the home is worth less than the mortgage, homeowners have a significant incentive to walk away from the payment, since lenders cannot then pursure them for the shortfall - Should negative equity be the real issue, the principal for the loans would have to be reduced, but lenders are reluctant as either the homeowners would choose to default or the investors would sue the lenders - House prices are still falling, so many homeowners are ought to have negative equity again
Ariel Shain

What Caused the Current Financial Crisis? - 0 views

www.stock-market-investors.com/...-current-financial-crisis.html

financial crisis what caused economics blame

shared by Ariel Shain on 12 Jan 11 - Cached
  • This was the case with the real estate bubble too and that was one of the main factors leading to the current financial crisis: the excess capital globally pushed an enormous amount of money into the US mortgage market thanks to the securitization and the fact that almost 80% of the US mortgage market is securitized.
  • The Problem with Securitization of Mortgages Basically, securitization is a wonderful financial vehicle. Mortgages are pooled together as securities and sold to investors. Of course, as securities, they can also be resold. Securitization creates diversification and liquidity.
  • However, the problem with securitization stems from the fact that it does not provide protection against systematic risk. And unfortunately, such a systematic risk was also not priced into the subprime mortgage pools... not until things went wrong and subprime borrowers started defaulting on their mortgages.
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  • The subprime lending increased the homeownership rate in the United States significantly and about 5 million people went from tenants to homeowners. As a result, rents went down and house prices went up till they reached unsustainable heights relative to rents.
  • Thus, when the rise in housing prices stopped in 2006, inevitably many subprime borrowers had difficulty making their mortgage payments. The housing bubble and particularly the excesses of the subprime mortgage market became even more evident when many subprime mortgage lenders began declaring bankruptcy around March 2007.
  • Confidence in many financial institutions was shaken and the stock market witnessed systemic weakness across financial sectors. The share prices for large, small, and investment banks all significantly dropped and between July 2007 and March 2008, lost about a third of their value. What is more, banks stopped trusting other banks and interbank lending was disrupted.
Apiraami Pathmalingam

The 2007-08 Financial Crisis In Review - 0 views

www.investopedia.com/...financial-crisis-review.asp

FED crisis

shared by Apiraami Pathmalingam on 12 Jan 11 - No Cached
  • Central banks in England, China, Canada, Sweden, Switzerland and the European Central Bank (ECB) also resorted to rate cuts to aid the world economy
  • led to a 40% decline in the U.S. Home Construction Index
  • by 2004, U.S. homeownership had peaked at 70%; no one was interested in buying or eating more candy
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  • To keep recession away, the Federal Reserve lowered the Federal funds rate 11 times - from 6.5% in May 2000 to 1.75% in December 2001 - creating a flood of liquidity in the economy.
  • prey in restless bankers - and even more restless borrowers who had no income, no job and no assets.
  • environment of easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages look like a new rush for gold.
  • Fed continued slashing interest rates, emboldened, perhaps, by continued low inflation despite lower interest rates
  • Fed lowered interest rates to 1%, the lowest rate in 45 years.
  • everything was selling at a huge discount and without any down payment.
  • the entire subprime mortgage market seemed to encourage those with a sweet tooth for have-it-now investments.
  • trouble started when the interest rates started rising and home ownership reached a saturation point
  • Federal funds rate had reached 5.25%
  • home prices started to fall
  • many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans
  • financial firms and hedge funds owned more than $1 trillion in securities backed by these now-failing subprime mortgages - enough to start a global financial tsunami if more subprime borrowers started defaulting
  • could not solve the subprime crisis on its own and the problems spread beyond the United State's borders
  • interbank market froze completely
  • central banks and governments around the world had started coming together to prevent further financial catastrophe
  • Fed started slashing the discount rate as well as the funds rate
  • Federal funds rate and the discount rate were reduced to 1% and 1.75%
  • Apiraami Pathmalingam on 12 Jan 11
     
    This article indicates the many events which have happened during 2007-2008. This articles include the homeowners reactions and much more.
Jeff He

Fannie Mae and Freddie Mac - Their Role in the Current Financial Crisis - 0 views

ezinearticles.com/?Fannie-Mae-and-Freddie-Mac---Their-Role-in-the-Current-Financial-Crisis&id=3892722

Mae Fannie financial crisis Causes

shared by Jeff He on 14 Jan 11 - No Cached
    • Jeff He
      Jeff He on 14 Jan 11
       
      Main cause of the financial crisis lies with government deregulation of lending practices and their push for higher homeownership.  
  • "Creative" lending practices dragged down overall lending standards
  • Big FMs and private banks were encouraged to employ "innovative" and " flexible" lending practices in order to help homeowners who could not previously qualify for a mortgage to be able to buy a home and make mortgage payments.
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  • increasing pressure from Bill Clinton's administration on Fannie Mae and Freddie Mac to increase lending quotas to minorities and middle and low-income home buyers in so- called "under-served" areas (usually inner cities).
  • being pushed by the Federal Housing initiatives Fannie & Freddie, private banks and the rest of the players in the housing and mortgage industry jumped on sub-prime bandwagon seeing only big profits ahead.
  • answer is correct destructive and dangerous housing practices and introduce more transparency and accountability for the banking sector.
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