Note card Gallery Walk Please walk around the

Note card § Gallery Walk: Please walk around the room and select a house you would like to purchase. § 1: House # § 2: Monthly payment for your home

Note card § Please select a random job card § 3: Job title § 4: Monthly salary

Note card § 5: Can you afford your new home? § Show of hands

The Sub-Prime Mortgage Crisis

Response Card § Put yo name! § 1: Why is it most American’s goal to own a home? § 2: What happens if you stop making your house payments (mortgage) on time?

Think-pair-share § Stand up… § Discuss with you (Patriot/TJ) partner your answers for #1 and #2. § 30 seconds

The Housing Boom: 1990 s-2000 s § § The introduction of… -new easy to get loans -low interest rates -and lower standards for people to qualify for a home loan allows for an increase in mortgage lending § Low interest rates encourage Wall Street investors to buy subprime loans (loans people will probably have trouble paying back) in greater quantities.

Why lenders buy/sell home loans… § I need 3 volunteers § Person A: You just bought a house but have bad credit and struggle making the payments. § Bank A: You loaned Person A the money for their home. § Bank B: You look to buy shaky loans from other banks on a discount and profit if people actually pay back their loan

Why lenders buy/sell home loans… § Example § Person A: Has bad credit and misses a few mortgage payments. § Bank A: Believes that Person A will be unable to pay back their loan so they sell the loan to Bank B to get at least some money back from the original loan. § Bank B: They bought the rights to the loan payments from Bank A in hopes that Person A will pay back the loan and Bank B will make money. (Is a guessing game) § Banks buy and sell multiple stable and risky loans everyday, it’s a guessing game if they ever pay off… (Some loans are more risky than others)

Response Card § 3: Why do banks buy/sell loans?

The downturn begins: § Interest rates rise and housing prices fall. § Lenders, rating agencies, and investors underestimated the number of loans that would default. § Banks continue to lured borrowers into taking out loans they couldn’t afford. § This leads to a 113% increase in foreclosures from July 2006 to July 2007. § 4: What's a foreclosure?

5: What happens to home prices in 2008?

The downturn continues: § Foreclosures on subprime mortgages force dozens of mortgage lenders/banks to go out of business or declare bankruptcy. § August 16 th, 2007 Countrywide Financial, the nation’s largest mortgage lender, borrows $11. 5 billion so that it can stay in business.

Response Card § 6: Does the US government have a responsibility in fixing economic disasters like the subprime mortgage crisis or is it the banks/free markets responsibility? Explain… § Share out

Government Action: § American Recovery and Reinvestment Act of 2009 § To avoid complete market failure and to allow banks to borrow money cheaply, the Federal Reserve, European Central Bank, and their counterparts flood the market with billions of dollars, euros, and yen to stabilize the market. § The government funds are designed to encourage banks to continue making loans rather than conserving cash and making the credit crunch worse. § #7: Did the US government do the right thing by giving these banks billions of dollars in an attempt to balance this mortgage crisis?

Who is to Blame? § #8: What group is to blame for this crisis? § Banks/Lenders: for their lending practices focused on risky mortgage candidates § Mortgage brokers: for steering borrowers to unaffordable loans § Appraisers: for inflating housing values § Wall Street investors: for backing risky mortgage loans without first verifying the high chance of foreclosure § Borrowers: for overstating income levels on loan applications and entering into loan agreements they could not afford § Government: for lack of oversight

Who is to Blame? (Vote) § Banks/Lenders: § Mortgage brokers: § Appraisers: § Wall Street investors: § Borrowers: § Government: