The US Housing Market and the Subprime Mortgage Crisis (A)


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Case Details:

Case Code : BENV014
Case Length : 21 Pages
Period : 2001-2007
Pub Date : 2008
Teaching Note :Not Available
Organization : -
Industry : Financial Services
Countries : USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts Contd...

Some Perspectives

According to some analysts, the roots of the subprime crisis lay in the policies adopted by Greenspan.

They argued that because the successive interest rate cuts in 2000-01 had made mortgage loans attractive, the demand for houses had increased (also helped in a significant measure by the actions of speculators) and this inflated demand had led to increases in house prices.

As the prices of houses increased, the size of the loans that borrowers took also increased, which resulted in more borrowers having to opt for subprime loans...

Outlook

In early 2007, analysts were concerned that the interest rate would be increased further as this would lead to more foreclosures. Borrowers who had taken loans in 2006 and were to start paying variable interest rates in mid or late 2007 were thought to be the most vulnerable. “What will they do when their payment starts to rise?” said Glenn Costello of Fitch Ratings...

Exhibits

Exhibit I: Primary and Secondary Mortgage Markets in the US
Exhibit II: Different Types of Mortgages
Exhibit III: Non -Traditional Mortgage Loans
Exhibit IV: Expansion in Subprime Lending: 1994 -2006
Exhibit V: The Process of Mortgage Origination
Exhibit VI: US House Price Trends from 1998 to 2007
Exhibit VII: US Mortgage Market in Q2 2007 (In Trillion $)
Exhibit VIII: Mortgage Backed Securities Market in the US: 1996- 2007

 

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