The U.S. bond market is almost twice the size of the combined market capitalization of all U.S. stock markets. Bonds are big players on the global financial stage. U.S. bond market debt (generally referred to as "the bond market") exceeds $27 trillion—making it by far the largest securities marketplace in the world. Mortgage Related Securities is $7.2 Trillion out of $27 Trillion.
Different types of Mortgages in US
1) Government Backed Mortgages- Administered by Federal house Administration, Veteran's Administration.
2) Conforming Mortgages- Mortgages eligible for purchase by Fannie Mae and Freddic Mac. Upto credit risk of 80% LTV and good credit history.
3) Jumbo Loans- Mortgages with principle greater than Conforming loans.
4) Sub Prime and Near Prime Loans- Subprime less than 620, Near Prime 620 to 680, Prime above 680.
5) Alt-A- When near Prime loans r securitized. They form Alt-A.
Sub Prime Lending is 20% and Jumbo Prime Lending is 12% as shown in Figure. So MBS which are causing turmoil are worth 1.44 + 0.86 Trillion.
Contract Features:
1) Fixed rate mortgage
2) Adjustable rate mortgage
To avoid high initial mortgage payments, many subprime borrowers took out adjustable-rate mortgages (or ARMs) that give them a lower initial interest rate. But with potential annual adjustments of 2% or more per year, these loans can end up costing much more. So a $500,000 loan at a 4% interest rate for 30 years equates to a payment of about $2,400 a month. But the same loan at 10% for 27 years (after the adjustable period ends) equates to a payment of $4,220.
Flaw1:
ARM at low interest rate means people taking more advantage of leverage. Such ARM's should be reduced and loans should have been given cautiously.
Mortgage Funding
1) GNMA or Ginie Mae securities are collateralized by FHA/VA securities.
2) Non Agency Mortgage Market: Jumbo and Sub Prime Lending in this category.
FreddiMac and FannieMae
1) Mortgaged Backed Securities
2) Debt Securities
Fannie and Freddie account for half of all mortgages in the US. Freddie and Fannie have lent or underwritten about £2.7 trn of the total £6 of outstanding mortgage debt in the US.
Flaw2:
They should have underwritten those Mortgages under more guidelines. Rather than becoming an intermediately and giving guarantees which can't be fulfilled. These organizations were the one who leveraged the problem to hell.
I-Banks and Commercial Banks
They were the one's to invest heavily in the Mortgage Securities.
Losses
CitiBank 56 Billion
Merrill 45 Billion
UBS 43 Billion
Flaw3:
Even AAA Rated thing has a systematic risk which should be considered. Even though the probability of occurrence might be meager but still it could have a cost, considering its weight. Everyone was betting over the Systematic Risk on Unsystematic Risk.
Effect over??
Properties with Foreclosure Activity
1.4 million In 2007
2.1 Million As in 3 quarters 2008.
'There are roughly 13 million subprime loans in the market today, the MBA says'.
How could it have been checked? Indicators ?
1) Home loans GDP ratio in US, UK continues to be at 50% as against 5% in India, it could have been an indication.
2) Subprime loans grew to 13.6 percent of the total mortgage market in 2006 from 2.4 percent in 2000, according to the Mortgage Bankers Association.
Solution
Long Term
1) Have better regulations on the Lender as well as Underwriter side.
2) Improve the employment opportunities in US
Short Term FannieMae
To achieve a more affordable mortgage payment, your loan servicer may:
1) Extend the term of your loan to as much as 40 years
2) Reduce your mortgage interest rate for a period of time
3) Defer payment of part of your principal, or offer a combination of all three.
'It is popular to take low lending standards as proof that the free market has failed, that the system
that is supposed to reward productive behavior and punish unproductive behavior has failed to do so'. May be it is inherent to Human that they have a short term approach and believe in the policy 'Let the last man bear'.
Different types of Mortgages in US
1) Government Backed Mortgages- Administered by Federal house Administration, Veteran's Administration.
2) Conforming Mortgages- Mortgages eligible for purchase by Fannie Mae and Freddic Mac. Upto credit risk of 80% LTV and good credit history.
3) Jumbo Loans- Mortgages with principle greater than Conforming loans.
4) Sub Prime and Near Prime Loans- Subprime less than 620, Near Prime 620 to 680, Prime above 680.
5) Alt-A- When near Prime loans r securitized. They form Alt-A.
Sub Prime Lending is 20% and Jumbo Prime Lending is 12% as shown in Figure. So MBS which are causing turmoil are worth 1.44 + 0.86 Trillion.
Contract Features:
1) Fixed rate mortgage
2) Adjustable rate mortgage
To avoid high initial mortgage payments, many subprime borrowers took out adjustable-rate mortgages (or ARMs) that give them a lower initial interest rate. But with potential annual adjustments of 2% or more per year, these loans can end up costing much more. So a $500,000 loan at a 4% interest rate for 30 years equates to a payment of about $2,400 a month. But the same loan at 10% for 27 years (after the adjustable period ends) equates to a payment of $4,220.
Flaw1:
ARM at low interest rate means people taking more advantage of leverage. Such ARM's should be reduced and loans should have been given cautiously.
Mortgage Funding
1) GNMA or Ginie Mae securities are collateralized by FHA/VA securities.
2) Non Agency Mortgage Market: Jumbo and Sub Prime Lending in this category.
FreddiMac and FannieMae
1) Mortgaged Backed Securities
2) Debt Securities
Fannie and Freddie account for half of all mortgages in the US. Freddie and Fannie have lent or underwritten about £2.7 trn of the total £6 of outstanding mortgage debt in the US.
Flaw2:
They should have underwritten those Mortgages under more guidelines. Rather than becoming an intermediately and giving guarantees which can't be fulfilled. These organizations were the one who leveraged the problem to hell.
I-Banks and Commercial Banks
They were the one's to invest heavily in the Mortgage Securities.
Losses
CitiBank 56 Billion
Merrill 45 Billion
UBS 43 Billion
Flaw3:
Even AAA Rated thing has a systematic risk which should be considered. Even though the probability of occurrence might be meager but still it could have a cost, considering its weight. Everyone was betting over the Systematic Risk on Unsystematic Risk.
Effect over??
Properties with Foreclosure Activity
1.4 million In 2007
2.1 Million As in 3 quarters 2008.
'There are roughly 13 million subprime loans in the market today, the MBA says'.
How could it have been checked? Indicators ?
1) Home loans GDP ratio in US, UK continues to be at 50% as against 5% in India, it could have been an indication.
2) Subprime loans grew to 13.6 percent of the total mortgage market in 2006 from 2.4 percent in 2000, according to the Mortgage Bankers Association.
Solution
Long Term
1) Have better regulations on the Lender as well as Underwriter side.
2) Improve the employment opportunities in US
Short Term FannieMae
To achieve a more affordable mortgage payment, your loan servicer may:
1) Extend the term of your loan to as much as 40 years
2) Reduce your mortgage interest rate for a period of time
3) Defer payment of part of your principal, or offer a combination of all three.
'It is popular to take low lending standards as proof that the free market has failed, that the system
that is supposed to reward productive behavior and punish unproductive behavior has failed to do so'. May be it is inherent to Human that they have a short term approach and believe in the policy 'Let the last man bear'.
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