Video case study summar1z

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1. Video case study summary The Beginning of the Crisis The financial house of cards was slowly built following the 9/11 attacks. As the U.S. government tried to revive the economy by repeatedly dropping interest rates, families lunged at the opportunity to refinance their mortgages. Now, the collapse of the mortgage market is felt around the world. Quick Loan Funding Quick Loan Funding targeted people who couldn't afford a down payment and had poor credit so-called "sub-prime borrowers." Mortgage lender Daniel Sadek, head of Quick Loan Funding, drastically reduced borrowers' credit requirements and may have raked in as much as $5 million a month in personal profits. After cranking out thousands of sub-prime mortgages, credit began to dry up and Quick Loan eventually closed. The Lenders Lou Pacific was Vice President of Quick Loan Funding. Pacific: "They made a name for themselves by doing really the nasty loans that a lot of people wouldn't do." Lenders were giving a mortgage to almost anyone. With no shortage of eager borrowers, the sub-prime mortgage business was booming. Lou Pacific lost his job when Quick Loan closed. Bill Dallas started a new company, Ownit, and offered to sell Wall Street a mortgage for borrowers who weren't quite "prime." It was a 100% home loan for people with good credit who couldn't afford a down payment. In 2006, Ownit made $9.5 billion in home loans. Later, the worst of his loans came back to haunt him. It only took a few loans defaulting to topple Ownit. The Buyers Cynthia Simons craved a better life for her family and wanted to leave the crime-ridden Compton, Ca. She thought her prayers were answered by a mortgage broker from her church who found the family a house in an upscale neighborhood. Was Cynthia’s dream house too good to be true? Simons says her broker grossly exaggerated her income and without her knowledge arranged two mortages, one a loan for her down payment, the other an adjustable rate mortgage on the home. Now, Cynthia still has the house, but can no longer keep up with her mortgage payments. Arturo Trevilla bought a house with an adjustable rate mortgage. He planned to refinance his mortgage before the payments went up. The idea seemed simple, but the paperwork was tricky. Arturo says “it was hard for me to understand, I just trusted a broker.” But with a salary of $900 a week he knowingly signed documents claiming he made four times as much and bought a $584 thousand dollar San Clemente, CA townhouse. He eventually lost his home to foreclosure.

The ''Refi'' Years In 2004 homeowners withdrew an estimated $900 billion dollars by refinancing and spent the money on whatever they could buy. Homes had turned into ATM machines and the economy flourished. Main Street Homeowners everywhere were tapping into their biggest asset…the equity growing within their four walls. Ernesto and Trina Contreras of Riverside, CA refinanced their family’s home. Ernesto: "We took a little money out to build our swimming poll, you know, 'cause I have three boys and I gotta keep 'em happy.“ Today, the couple has stopped paying their mortgage which adjusted to a higher payment they can no longer afford. Wall Street Lenders were more than happy to issue mortgages and Wall Street was more than happy to have a new supply of mortgages to package up and sell to hungry investors around the world. It seemed everyone was spending and making money. But, just like many homeowners, a lot of investors didn't quite understand what kind of mortgages they were buying. Wall Street Banks Michael Francis spent years at a major Wall Street bank that ramped up its business in mortgage-back securities. Francis enlisted lenders on the West Coast to supply him with mortgages he could sell to investors. His bank was so eager that it dropped many requirements for the mortgages it was willing to sell. Francis: "We removed the litmus test. No income, no asset. Not verifying income, breathe on a mirror and if there's fog you sort of get a loan." Ratings Agencies Ann Rutledge rated securities for Moodys. During the boom, when home prices surged and virtually no borrowers defaulted, she says the riskier Triple-B rated securities made from mortgages looked as good as the safe Triple-A's. Rutledge: "Eventually the market gets smart and says, let's owner the requirements for Triple-A.“ The credit rating agencies had an incentive to award a security the best possible ratings. That's because the agencies were paid for their appraisals by the very banks that issued the securities. Moody's says it "properly manages the potential for conflicts of interest and has added new safeguards that further address those conflicts." CDOs CDOs – Collateralized Debt Obligations. These structured products are highly complicated investments. The debt securities are bundled and re-sold but often buyers don't

really know exactly what they are purchasing. Even Alan Greenspan admitted he was befuddled by the CDO. Narvik, Norway Exploring just how far the effect of the credit crisis extended, CNBC traveled to Narvik, Norway, a town far above the Arctic Circle that was convinced it could solve its budget problems by investing in Wall Street's wares, primarily CDOs. Town leaders thought it was a safe investment. But the investment collapsed. Now, the town has closed a school and slashed services for the elderly. The Federal Reserve Retrospect Then Federal Reserve Chairman Alan Greenspan clearly didn't realize the full extent of the housing bubble in 2005. He says the enormous growth in sub-prime mortgages came to him as "a revelation”. He defends decisions he made that critics say laid the groundwork for the crisis. He says the Fed only lowered interest rates to "maintain liquidity in the system," not to boost the housing market. Prevent the Housing Bubble? Alan Greenspan says even if he did know the true dimensions of the housing bubble back then, he wouldn't have been able to stop it. "Had we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress, when it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society –- would we have been able to do that? I doubt it." The Investors In a rare interview, CNBC's David Faber speaks with one of the few savvy investors who bet against the mortgage-backed security fever – Kyle Bass - whose hedge fund soared 600% in just eighteen months as the mortgage market collapse. True Predictions Kyle Bass was convinced the booming housing market was really one big house of cards and began to find ways to profit from it. He invested in "credit protection," a kind of insurance on various mortgage-backed securities. As those securities declined in value, his insurance paid off. Kyle Bass' hedge fund made more than a billion dollars in profit.

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