TABLE OF CONTENTS

How did the Subprime Lending Crisis

Happen?
An Example of a Subprime Mortgage
Ethics Issues
Lessons learned

HOW DID THE SUBPRIME MORTGAGE CRISIS HAPPEN?

Cynthia Lauzon

WHAT ARE SUBPRIME MORTGAGES?

Typically, those who qualify for the most ideal
mortgages with the best interest rates are those with
good credit scores and minimal debt.
A subprime mortgage is a type of loan granted to
individuals with poor credit histories (typically below
600), who would not be able to qualify for conventional
mortgages.
Subprime mortgages charge interest rates that are
above the typical interest rate because of the risk that is
involved on the part of the lender.

THE FORECLOSURE CRISIS WAS

CAUSED BY:
Wall Street Greed
Mortgage backed securities and subprime lending
Regulatory Failures
Lack of government regulation of the financial sector
Unstable Economy
Wages stagnated leading to greater household debt

The introduction of exotic loans, adjustable rate mortgages, and

relaxed standards allows for an increase in subprime mortgage
lending.
Low interest rates encourage Wall Street investors to back
subprime loans in greater quantities.
Hedge funds worldwide borrow money to invest heavily in
subprime mortgages.

A SUBPRIME MORTGAGE EXAMPLE

Cesar Rodriguez

GSAMP TRUST 2006-S3

Created by Goldman Sachs Alternative Mortgage
Products (GSAMP)
$492 million on California homes
8,272 ultra-risky second mortgage loans
13 tranches
Rated by S&P and Moodys
93% of value depended on rating grade

INVESTMENT-GRADE-TRENCHES:
$336 million-lowest interest and least risk-3 trenchesnamed A-1, A-2, A-3
$123 million-next to be paid, progressively higher risk-7
tranches, M-1 to 7
$35 million-last to be paid-highest risk-3 tranches, B1 to 3

RISKY BUSINESS
Uneven distribution of risk
Buyers relied on Goldman
Sachs
No access to original docs or
information
Liability statement
Rating companies cooperated

Delayed measures
Goldman Sachs wins

ETHICS ISSUES IN THE FINANCIAL CRISIS

Ibissa Azcona

ROOT CAUSE OF THE MORTGAGE

CRISIS?
Greed
Incompetence
Dishonesty
Conflicts of
Interest

LAX REGULATIONS POLICIES

Congress repeal of Glass-Steagall Act by replacing it
with Gramn-Leach-Billey Act
U.S. Regulators were not enforcing regulations
Federal Reserve
Securities and Exchange Commission
Office of the Comptroller of the Currency
Poor risk management from credit rating agencies

BANKERS BLAME NEW STANDARDS

Financial assets are

to be reevaluated
each reporting period
Many affected
executives were
calling for change in
this accounting rule
M2M was not the
reason for the
defunct banks

LESSONS LEARNED
Ana Hernandez

CONTROVERSY
BORROWER

LENDER
Knew what they were
doing
Wanted to make a sale
Didnt explain everything
Lied
Shouldnt have lend
money if they knew the
risk

Did not thoroughly read

the documents

Should of done their

research

Shouldnt have
borrowed if they knew
they couldnt afford it

If they didnt understand

then why agree to the
loan?

 Be realistic
Ask questions
Dont be
nervous
Do your
research
SAVE SAVE
SAVE!