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Subprime

The document summarizes the subprime mortgage crisis. It describes how subprime mortgages were targeted at borrowers with low credit ratings who had difficulty obtaining traditional financing. Mortgage brokers originated many subprime loans, which were then pooled and securitized into complex financial products called collateralized debt obligations (CDOs) that were rated highly and sold to investors. Eventually, falling home prices led to widespread defaults on subprime mortgages, causing the value of CDOs to plummet and resulting in trillions in losses that shook the global financial system and economy.

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27 views

Subprime

The document summarizes the subprime mortgage crisis. It describes how subprime mortgages were targeted at borrowers with low credit ratings who had difficulty obtaining traditional financing. Mortgage brokers originated many subprime loans, which were then pooled and securitized into complex financial products called collateralized debt obligations (CDOs) that were rated highly and sold to investors. Eventually, falling home prices led to widespread defaults on subprime mortgages, causing the value of CDOs to plummet and resulting in trillions in losses that shook the global financial system and economy.

Uploaded by

aqua144
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Subprime Mortgage

Crisis

Presented by : Anuj Dasot


MBA/07/1230
Objective of study

 My objective is learning about the


global mess created by so called
“subprime” .Understanding the
various financial instruments, their
structuring, the hidden risks and the
respective returns involved.
Flow of Presentation
 INTRODUCTION
 PRIME V/S SUBPRIME
 CDO’S AND SECURITIZATION
 THE SUBPRIME MONEY TRAIL
 CAUSES OF SUBPRIME
 EFFECTS
 CONSQUENCES-WORLD OVER
 MAJOR BANKS AFFECTED WORLDWIDE
 IMPACT ON INDIAN ECONOMY
 MEASURES TAKEN
Prime
 Prime Mortgage

• Borrow <80 % of House price

• Good record from credit bureau

• Monthly payment < 25 % income

• Good Credit Scoring


Sub-prime

 Sub prime refers to those mortgages targeted


at consumers with impaired or low credit
ratings who may find it difficult to obtain
finance from traditional sources.

 A combination of high interest rates, bad


credit history and murky financial situations
associated with the applicants.
Prime v/s Subprime
Asset-backed security (ABS)

 Type of bond or note that is based


on pools of assets. Assets are pooled
to make otherwise minor and
uneconomical investments
worthwhile, while also reducing risk
by diversifying the underlying assets.
Securitization
 Securitization typically applies to assets
that are illiquid (i.e. cannot easily be
sold).
 Common in the real estate industry.
 Investors "buy" these assets by making
loans which are secured against the
underlying pool of assets and its
associated income stream.
 Converts illiquid assets into liquid assets
by pooling, underwriting and selling their
ownership in the form of asset-backed
security (ABS).
Collateralized debt obligations (CDOs)

 A type of asset-backed security and


structured credit product.
 CDOs divide the credit risk among
different tranches: senior tranches (rated
AAA), mezzanine tranches (AA to BB), and
equity tranches (unrated).
 Losses are applied in reverse order of
seniority and so junior tranches offer
higher interest rates to compensate for
the added risk.
CDOs Credit Ratings

Senior : AAA

CDOs Mezzanine
AA TO BB

Equity : unrated
Government
regulators
Financial
Borrowers
Institutions

Mortgage
Underwriters CAUSES Securitization

Central Credit Rating


Banks Agencies
Mortgage
Brokers
House prices start to fall

Bankruptcy
Sub-prime Crisis
Consequences
Inflation treat

Oil Prices increases


Impact on Indian Economy
 Monetary policy tightened

 Exports declined

 FII’S withdrew from stock market

 Icici Bank-Worst hit among Indian


banks with a loss of $246m.
Major banks affected worldwide
Measures Taken
The federal reserve

Loan modification

Credit rating agencies

Bank financial health

Media
THANK YOU
WHAT LIES

AHEAD????

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