Sub Prime Crisis
Content
Presentation on Sub-Prime crisis
Submitted by-Mayank Gupta(12228) Tushar Barech(122 ) Chinmay kothe(12216) Shalini Patro(1224 ) Pooja Singh(122
Topics covered in presentation •
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•
•
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•
What is sub-prime. Sub prime crisis. Cause of crisis. Effects on US. Global effects. Solutions that curbed the crisis. Precautions that could have taken .
What is sub-prime •
‘Sub-prime’ actually refers to the credit status of
•
borrowers. Credit score less than ideal.
•
Any loan that does not meat with ‘prime’ guidelines.
•
Sub-prime lending is risky for both lenders and borrowers due to
1. High interest rate 2. Poor credit history 3. Adverse financial situation •
Sub prime loan is offered at a rate higher than normal loan rate.
Reason for it’s boiling •
•
•
•
•
Lending started to sub prime individuals. In 1996 , the rate was 9%. To attract customers some innovation did by financial lending institution. Inception of ARM(adjustable rate mortgage). Who adopted ARM previous debt Unexpected Medical issues lost a job
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•
•
•
•
•
In 2004 sub prime lending rate reached to 21%. Investors appetite for mortgage backed security. To high risk borrowers , high risk loan options and incentives. Btw 1997 and 2006 ,house prices increased by 124%. Appreciation of prices ,encouraged the sub prime borrowers. Resulting them borrowing more at ARM. And then.......
bomb exploded..
•
•
•
•
•
•
•
Housing prices depreciated in many part of US. Refinancing have become difficult. Leaving home-owners with higher payments then anticipated. Steep rise in the sub prime mortgage. Caused more than 100 sub-prime lenders to fail or file for bankrupcy. USA’s second biggest subprime lender , New
Century Financial Corporation failed. Failure of these companies caused collapsing of $6.5 trillion MBS(mortgage backed security).
Impact on US and World •
•
•
Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. A broad U.S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak.
•
•
• •
• •
Home equity valued valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 . savings and investment assets lost $1.2 trillion and pension assets lost $1.3 trillion. More and more financial firms either merged. the CEOs of Merrill Lynch and Citigroup resigned within a week of each in late 2007. Traders across the world traded in these companies faces huge losses. Big investors in these companies downgraded their balance-sheet.
•
•
•
•
•
Losses in these companies causes loss in goodwill and loss of shareholders. Ultimately hitting on the USA’s , Europe and Asian market’s hedge
fund companies ,banks ,traders. Invested in subprime mortgage industry found their investment near valueless. Money market subject to a bank run. Interbank lending, quadrupled shortly after the Lehman failure
As a result.. •
•
•
•
•
•
•
Right now there is ‘’liquidity crisis’’ on wall
Street. Because so many sub prime loans are in default. Wall street investor are no longer supplying money to market who used to lend ahead. Policies have become tight. Sub-prime borrowers are no longer able to refinance their loans. Now they take short term adjustable loans ,which are for 2-3 years with high interest rates. Unexpected UK market also got affected.
•
•
• •
•
•
In 2011, 872,000 previously foreclosed homes in the hands of banks. Lowered the target for the Federal fund rate from 5.25% to 2%, and the discount rate from 5.75% to 2.25%. Central banks have also lowered the interest rates. Several major financial institutions either failed, were bailed-out by governments. During the last quarter of 2008,the federal reserv bank ,European central bank and other central banks purchased US$2.5 trillion of government debt . The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion.
Solutions that curbed the crisis •
•
•
•
•
•
Loan modification. Less pumping of money into the market for slowing down crisis. Ensure taxpayers are not on the hook for any losses. creating a monetary pool funded by the largest financial institutions. Require stronger capital and liquidity positions for financial firms and related regulatory authority. Establish a bond fund to pay for switching borrowers out of unaffordable ARMs.
Our suggestion to avoid such crisis •
•
•
•
• •
•
Never respond favourably to a solicitation without first checking other options. In terms of a citizen of any country ,having less credit score should not be influenced by new innovative high risk and high interest rate ,loans. Or if you want to take the loan ,take the suggestion from your financial consultant or any other consultancy service. And as a financial company or lender don’t provide loans to anyone
having very less credit score. Check their other old records. If you want to then keep something strong as a security like gold ,jwellary , shares or any other money market instrument if they have. Don’t make and increase NPA’s.
Submitted by-Mayank Gupta(12228) Tushar Barech(122 ) Chinmay kothe(12216) Shalini Patro(1224 ) Pooja Singh(122
Topics covered in presentation •
•
•
•
•
•
•
What is sub-prime. Sub prime crisis. Cause of crisis. Effects on US. Global effects. Solutions that curbed the crisis. Precautions that could have taken .
What is sub-prime •
‘Sub-prime’ actually refers to the credit status of
•
borrowers. Credit score less than ideal.
•
Any loan that does not meat with ‘prime’ guidelines.
•
Sub-prime lending is risky for both lenders and borrowers due to
1. High interest rate 2. Poor credit history 3. Adverse financial situation •
Sub prime loan is offered at a rate higher than normal loan rate.
Reason for it’s boiling •
•
•
•
•
Lending started to sub prime individuals. In 1996 , the rate was 9%. To attract customers some innovation did by financial lending institution. Inception of ARM(adjustable rate mortgage). Who adopted ARM previous debt Unexpected Medical issues lost a job
•
•
•
•
•
•
In 2004 sub prime lending rate reached to 21%. Investors appetite for mortgage backed security. To high risk borrowers , high risk loan options and incentives. Btw 1997 and 2006 ,house prices increased by 124%. Appreciation of prices ,encouraged the sub prime borrowers. Resulting them borrowing more at ARM. And then.......
bomb exploded..
•
•
•
•
•
•
•
Housing prices depreciated in many part of US. Refinancing have become difficult. Leaving home-owners with higher payments then anticipated. Steep rise in the sub prime mortgage. Caused more than 100 sub-prime lenders to fail or file for bankrupcy. USA’s second biggest subprime lender , New
Century Financial Corporation failed. Failure of these companies caused collapsing of $6.5 trillion MBS(mortgage backed security).
Impact on US and World •
•
•
Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. A broad U.S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak.
•
•
• •
• •
Home equity valued valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 . savings and investment assets lost $1.2 trillion and pension assets lost $1.3 trillion. More and more financial firms either merged. the CEOs of Merrill Lynch and Citigroup resigned within a week of each in late 2007. Traders across the world traded in these companies faces huge losses. Big investors in these companies downgraded their balance-sheet.
•
•
•
•
•
Losses in these companies causes loss in goodwill and loss of shareholders. Ultimately hitting on the USA’s , Europe and Asian market’s hedge
fund companies ,banks ,traders. Invested in subprime mortgage industry found their investment near valueless. Money market subject to a bank run. Interbank lending, quadrupled shortly after the Lehman failure
As a result.. •
•
•
•
•
•
•
Right now there is ‘’liquidity crisis’’ on wall
Street. Because so many sub prime loans are in default. Wall street investor are no longer supplying money to market who used to lend ahead. Policies have become tight. Sub-prime borrowers are no longer able to refinance their loans. Now they take short term adjustable loans ,which are for 2-3 years with high interest rates. Unexpected UK market also got affected.
•
•
• •
•
•
In 2011, 872,000 previously foreclosed homes in the hands of banks. Lowered the target for the Federal fund rate from 5.25% to 2%, and the discount rate from 5.75% to 2.25%. Central banks have also lowered the interest rates. Several major financial institutions either failed, were bailed-out by governments. During the last quarter of 2008,the federal reserv bank ,European central bank and other central banks purchased US$2.5 trillion of government debt . The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion.
Solutions that curbed the crisis •
•
•
•
•
•
Loan modification. Less pumping of money into the market for slowing down crisis. Ensure taxpayers are not on the hook for any losses. creating a monetary pool funded by the largest financial institutions. Require stronger capital and liquidity positions for financial firms and related regulatory authority. Establish a bond fund to pay for switching borrowers out of unaffordable ARMs.
Our suggestion to avoid such crisis •
•
•
•
• •
•
Never respond favourably to a solicitation without first checking other options. In terms of a citizen of any country ,having less credit score should not be influenced by new innovative high risk and high interest rate ,loans. Or if you want to take the loan ,take the suggestion from your financial consultant or any other consultancy service. And as a financial company or lender don’t provide loans to anyone
having very less credit score. Check their other old records. If you want to then keep something strong as a security like gold ,jwellary , shares or any other money market instrument if they have. Don’t make and increase NPA’s.
