Name of Student Ankita Baburao Nighut

Class S Y MBA
Div. B
Roll no. 63
FDRM Case 1-Sub-prime Crisis
What Is a Subprime Mortgage?
o Subprime mortgages are named for the borrowers that the mortgages are given to. If
the prime rate for a mortgage is what is offered to people with good credit and a
history of dependability, subprime is for those who have struggled to meet those
standards. People who are approved of subprime mortgages historically have low
credit scores and problems with debt.
o There is no exact established number, but a FICO score below 640 is generally seen
as subprime for a loan like a mortgage. People with spotty credit histories like this
often have tremendous difficulty getting approval on a mortgage, and as such the
monthly payments have much higher interest rates than normal since the lenders view
the loan as much riskier.
How Did the Subprime Mortgage Crisis Start?
o It doesn't happen overnight. In the early-to-mid 2000s, interest rates on house
payments were actually quite low. In what looked to be a solid economy after a brief
early 2000s recession, more and more people with struggling credit were able to
qualify for subprime mortgages with manageable rates, and happily acted on that.
o This sudden increase in subprime mortgages was due in part to the Federal Reserve's
decision to significantly lower the Federal funds rate to spur growth. People who
couldn't afford homes or get approved for loans were suddenly qualifying for
subprime loans and choosing to buy, and American home ownership rose
exponentially.
o Real estate purchases rose not only for subprime borrowers, but for well-off
Americans as well. As prices rose and people expected a continuation of that,
investors who got burned by the dot com bubble of the early 2000s and needed a
replacement in their portfolio started investing in real estate.
What Parties Were to Blame for the Crisis?
o The subprime mortgage crisis, which guided us into the Great Recession, has many
parties that can share blame for it. For one, lenders were selling these as mortgage-
backed securities.
o After the lenders approved and gave out the loan, that loan would be sold to an
investment bank. The investment bank would then bundle this mortgage with other
 similar mortgage for other parties to invest in, and the lender would, as a result of the
sale, have more money to use for home loans.
o It is a process that had worked in the past, but the housing bubble saw an unusually
large number of subprime mortgages approved for people who struggled with credit
and income. When the Fed began raising interest rates over and over, those loans
became more expensive and the borrowers found themselves unable to pay it off.
Effects of the Mortgage Crisis
o Home prices fell tremendously as the housing bubble completely burst. This crushed
many recent homeowners, who were seeing interest rates on their mortgage rise
rapidly as the value of the home deteriorated. Unable to pay their mortgage on a
monthly payment and unable to sell the home without taking a massive loss, many
had no choice.
o The banks foreclosed on their houses. Homeowners were left in ruins, and many
suburbs turned into ghost towns.
o Even homeowners with good credit who qualified for standard mortgages struggled
with the steadily rising interest rates
Subprime Mortgage Crisis and Lehman Brothers
o Lehman Brothers was one of the largest investment banks in the world for years. It
was also one of the first investment banks to get very involved with investing in
mortgages, something that would pay off until it became their downfall.
o The plummeting price of real estate and the widespread defaulting on mortgages
crushed Lehman Brothers. They were forced to close their subprime lenders, and
despite their many attempts to stop the bleeding (such as issuing stock) they continued
to take on losses until, on Sept. 15, 2008, Lehman Brothers applied for bankruptcy.
Subprime Mortgages Today
o Subprime mortgages disappeared for a while after this, since they were seen as one of
the largest parts of an economic collapse. But they've been somewhat rebranded, as
lenders have begun selling "non-prime loans" to borrowers struggling with their
credit.
o There are also other forms of loans and debt that some economist’s fears have
concerning similarities with the subprime mortgages of the mid-2000s. For example, a
2017 Citi report showed parallels between the subprime mortgage crisis and today's
ever-growing student loan debt.
o Millennials with student loan debt have been a prime candidate for lenders to offer
these non-prime loans to, sparking concerns that financial institutions have failed to
learn or are ignoring the lessons from a decade ago.
2008 Subprime Crisis:
• The US subprime mortgage crisis was a set of events and conditions that led to a
financial crisis and subsequent recession that began in 2008.
• Characterized by a rise in the inability to pay housing mortgages resulting in the
decline of securities backed by mortgages.
• These mortgage-backed securities (MBS) initially offered attractive rates of return.
• However, the lower credit quality ultimately caused massive defaults.
• The money was sucked out of several banks, financial institutions and the economy as
a whole in September 2008.
• Several European and developing countries had invested heavily in American banks.
• The subsequent loss of funds resulted in the Global Recession of 2008.
• More subprime borrowers failed to pay their debts.
• Securities held by mortgages lost value globally.
• Global investors also drastically reduced purchases of mortgage-backed debt and
other securities.
• Concerns about the soundness of U.S. credit and financial markets led to tightening
credit around the world and slowing economic growth in the U.S. and Europe.
• The U.S. entered a deep recession, with nearly 9 million jobs lost during 2008 and
2009.
• This recession was second to only 'The Great Depression of the 1920 prime’s prime '
resulting in huge losses.
• Up until 2006, the housing market in the United States was flourishing due to the fact
that it was so easy to get a home loan.
• Individuals were taking on subprime mortgages, with the expectations that the price
of their home would continue to rise and that they would be able to refinance their
home before the higher interest rates were to go into effect. 2005 was the peak of the
subprime boom. At this time, 1 in 5 mortgages was subprime.
• However, the housing bubble burst and housing prices had reached their peak. They
were now on a decline.
• Northern Rock Bank had difficulty finding finance to keep the business going and
was nationalized in February 2008.
• In September 2008 British bank Bradford Bingley was nationalized by the UK
government, which will take control of the bank's £50bn mortgages and loans, while
its savings operations and branches are to be sold to Spain's Santander.
• Germany struggled to rescue lender Hypo Real Estate (Mortgage Giant), underlining
the challenge facing European leaders, who vowed to restore stability in a banking
system hit by the worst crisis since the 1930s.
• In October 2008, the Australian government announced that AU $4 billion was to be
raised to fund non- bank lenders that are unable to obtain funding to finance new
loans. After industry feedback this was increased to AU$8 billion.
• Japanese financial powerhouse, Nomura Holdings Inc. bought over Lehman's
franchise in Europe and Asia Pacific, including Japan and Australia.
• Stock markets tanked - Crisis caused panic in the financial markets and investors sold
out and withdrew their money, resulting in sharp drop in stock prices
• Many banks, mortgage lenders, real estate investment trusts & hedge funds suffered
significant losses
• Credit got tighter - banks became extremely careful parting with their capital and
decreased lending activities either to business houses, retail customers and even to
each other.
• Stock markets tanked - Crisis caused panic in the financial markets and investors sold
out and withdrew their money, resulting in sharp drop in stock prices
• Many banks, mortgage lenders, real estate investment trusts & hedge funds suffered
significant losses.
• Credit got tighter - banks became extremely careful parting with their capital and
decreased lending activities either to business houses, retail customers and even to
each other.
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