THE SUB-PRIME CRISIS

By:
Bhanupriya Baswala 184
Charmi Gala 193
Shilpa Sarnaik 225
Shivani Singh 235
Prime Mortgage

Loan to borrowers with perfect
credit criteria
Less risk
More secured loans
Low interest rates

Subprime
mortgage

Subprime mortgages are loans to borrowers
with imperfect credit criteria
High interest rates
Poor collateral quality
Less favorable terms to compensate credit
risk
A structure financial product that pools together
cash flows generating and repackages these asset
pool into discreet tranches that can be sold to the
investors
Involves security firms, CDO managers, rating
agencies, financial guarantors and investors

Collateral Debt Obligation
The Credit Crisis Story
House Owners Investors
On 11 September..
Federal reserve chairman Alan
Greenspan lowered interest rates
to 1% to keep the economy
strong..

THIS lures the banks who can
borrow the money at 1%
Other countries also borrow and this gives rise to cheap
credit
This made banks go crazy with as they came up with leverages..
Leverage is borrowing money to amplify the outcome of a deal
e.g. in 2 mins
Leverages got more and more money to the investment banks
Investment bank connected their unhappy investors to the house owners with
an idea
Lets see how it works!!!
Want Mortgage
CDO
Collateral Debt Obligation
The tranches of a CDO
are rated by a rating
agency
Turning Point
SUBPRIME MORTGAGES
More Risks
As if the House-owners
default the Investment bank
owns mortgages.
Its even better as housing
prices were rising
ALL are RICH
This creates an
interesting
problem for
house-owners
who are paying
their interests
1. Investment Bank tries
to sell his CDO
2. To pay back his
billions and millions
of money which he
once borrowed to
buy CDO






1. Counter Party Risks
2. Liquidity Risks
3. Asset Price Risks
4. Credit Risks
Mortgage Risks
There are roughly 70 million homes in the U.S. and 50 million
have a mortgage on them (average of roughly $200k).

That puts the overall housing market at about $10 trillion.

The amount of equity homeowners had in the 2nd quarter
climbed by $406 billion to $7.3 trillion, the highest level since
2007
Size of Us Housing Market
Housing Bubble
Historically Low Interest Rates
Rise of Subprime Lending
Declining Risk Premium
New Kind of Lender Emerges
Risky Mortgage Products and tax
Lending Standards



Roots of Subprime Crisis
Size of Us Housing Market
There are roughly 70 million homes in the U.S. and 50 million have a
mortgage on them (average of roughly $200k).
That puts the overall housing market at about $10 trillion.
The amount of equity homeowners had in the 2nd quarter climbed by
$406 billion to $7.3 trillion, the highest level since 2007
Fixed Rate Mortgages(FRMs)

Adjustable-Rate Mortgage(ARMs)

Alternative-A mortgage(Alt-A)
Types of Mortgage in US
Roots of Subprime Crisis
Housing Bubble
Historically Low Interest Rates
Rise of Subprime Lending
Declining Risk Premium
New Kind of Lender Emerges
Risky Mortgage Products and Lax Lending Standards



Other Issues Responsible for
Economic Crisis
Policies of Central Banks

Market-to-Market accounting rule

Globalization, technology and the trade deficit



GLOBAL
IMPACT OF
THE CRISIS
PARTICIPANTS OF SUBPRIME CRISIS
& THEIR ROLES
Borrowers
Lenders
Homebuyers
Investment Banks
Rating Agencies
Investor Behavior
Hedge Funds

Decline in Real Estate Market
Rise in home related Crime
Effect on municipal bonds and bond insurers
Decline in Homeowners net worth
Evictions of renters


Effects of Subprime Crisis
PARTICIPANTS OF SUBPRIME CRISIS
& THEIR ROLES
Borrowers
Lenders
Homebuyers
Investment Banks
Rating Agencies
Investor Behavior
Hedge Funds

SPECIFICS
GDP began contacting
Rise in unemployment rate
Fall in housing prices
Fall in stock market prices
Effects of Subprime Crisis
Decline in Real Estate Market
Rise in home related Crime
Effect on municipal bonds and bond insurers
Decline in Homeowners net worth
Evictions of renters


IMPACTS
IN
INDIA
Types of Mortgage in US
Fixed Rate Mortgages(FRMs)

Adjustable-Rate Mortgage(ARMs)

Alternative-A mortgage(Alt-A)
Impact on stock markets
Impact on Indias trade
Impact on Indias export
Impact on Indias handloom sector, jwellery
export and tourism.
Exchange rate depreciation
IT-BPO sector
FII and FDI

IMPACTS IN INDIA
Types of Mortgage in US
Fixed Rate Mortgages(FRMs)

Adjustable-Rate Mortgage(ARMs)

Alternative-A mortgage(Alt-A)
INDIRECT CONSEQUENCES
HIT INDIA HARDER..!!
Led to massive outflow of FII

It also compelled Indian bank and corporations to
shift their credit demand for external sources to the
domestic banking sector.
DOMINO EFFECT
THE DOMINO EFFECT
YOY GDP GROWTH %
Comparison of GDP growth% composition
CONCLUSION