Subprime Crisis

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Subprime Crisis : 

Subprime Crisis 1

Slide 2: 

Archana Bobde Amol Arulekar 2

What is Subprime Crisis??? : 

What is Subprime Crisis??? Definition Is the practice of making loans to borrowers who do not qualify for market interest Rates owing to various risk factors, e.g. income level, size of the down payment, credit history and employment status 3

Subprime Loan would mean high risk as well as high gain/ profit : 

Subprime Loan would mean high risk as well as high gain/ profit 4

causes : 

causes Securitization A process of standardizing contractual terms which allows a loan to be packaged with other contracts and sold as a diversified bundle to passive investors Adjustable Rate Mortgages (ARM) An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices 5

causes : 

causes Inaccurate Credit Ratings Credit Rating Agency (CRA) A company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves E.g. Moody’s, Standard & Poor's Excessive Risk taking in Government Sponsored Enterprises (GSEs) Government Sponsored Enterprises (GSEs) A group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent E.g. Fannie Mae and Freddie Mac 6

causes : 

causes MBS ( Mortgage- backed Security ) Mortgage-backed securities are a bundle of mortgages that have been sold by banks to Fannie Mae, who then repackages them and sells them to individual investors. This allows the banks and mortgage companies to sell mortgages off, and take them off their balance sheets. This removes one constraint on banks to make sure the loans are to qualified borrowers. 7

God Bless America : 

God Bless America 8

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