Econ 304 Final - Housing

Front 1

Housing

Back 1

Front 2

Old school model of banking starts to become unprofitable

Back 2

regulations on banking

-need to find new ways of making money

Front 3

New model of banking

Back 3

Front 4

new model of banking

Back 4

turn loans into securities and sell it

Front 5

advantages of selling securities

Back 5

- get loans off books
- avoid regulations by moving it to unrestricted settings of financial markets
- connect borrower to broader pool of lenders

Front 6

your choices when the mortgage interest payment goes up

Back 6

equity has built up
- can sell
- can refinance and take a loan from somewhere else
- if house price rose can take the difference as profit
incentive not to default

Front 7

if house prices stop rising when your mortgage interest payment goes up

Back 7

can't sell the house
penalty
can't afford.higher payments
incentive to default

Front 8

default incentives is affected by

Back 8

housing market trends

Front 9

if housing price is rising

Back 9

credit fuelled bubble
lot of subprime borrowing
these loans are securitized
defaults probability no longer low
incentive issues in normal chain
banking issues in the other chain

Front 10

regular mortgage payment

Back 10

can afford
stable job and income
ok when housing prices go down

Front 11

housing bubble + Subprime lending + Securitization

Back 11

interaction has banking underlying
if they blow up it blows up the banking

Front 12

Originator/underwriter

Back 12

-bank

-whoever makes the loan

Front 13

Originator/underwriter incentives

Back 13

very weak for sensible loans

-After selling not their problem

Front 14

Arrangers

Back 14

Investment bank

-creates securities

-financial engineering

-also can loan to short term lendors

Front 15

Vehicle

Back 15

some kind of company that can sell these assets

-get it off arranger's own books

Front 16

Asset manager

Back 16

-mutual, pension funds etc

-regulated

-decision made according to ratings

Front 17

Investors/savers

Back 17

final end of chain

Front 18

Short term lenders

Back 18

Can lend/borrow from arrangers

-normal banking

Front 19

Rating agencies

Back 19

rate the securities

Front 20

rating agencies and arrangers

Back 20

arrangers like used car salesmen

-conflict

Front 21

arrangers need

Back 21

good ratings

Front 22

asset managers

Back 22

need truth

Front 23

originator/underwriter

Back 23

bankswhoever makes the loanincentives very weak- its other peoples problem after unloading the loans

Front 24

arrangers

Back 24

investment bankscreate the securities through financial engineering

Front 25

vehicle

Back 25

some kind of company that sell the assets.

Front 26

asset manager

Back 26

mutual funds pension funds etcregulatedbuy the assers of arrangers.

Front 27

ratings agencies

Back 27

give ratingsasset managers decide based on ratings

Front 28

conflict between ratings agencies and arrangers

Back 28

-arrangers need good ratings- asset managers need the truth

Front 29

more securitization

Back 29

cheaper creditglobal savings increase

Front 30

savings increase

Back 30

cheaper borrowingdemand for housing increasea

Front 31

when mortgage interest payments go up

Back 31

choice to default or keep paying low default ratenormal distribution