The Banks Effect on the Housing Market

By: Amber Sime

Video

• http://crisisofcredit.com/

Effect on the Housing Market• http://news.bbc.co.uk/2/hi/business/7073131.stm

• By 2005, 1 in 5 mortgages were subprime. • Immigrants- * Hot areas: California, Arizona, Nevada, Washington

D.C, and New York.• ARM’s

Bank Rescue of 2008• Emergency Economic Stabilization Act of 2008• Authorized the U.S. Treaty to buy risky and

nonperforming debt from lending companies• Funding• Raise taxes• Interest rates low

AIG Bailout

• $182 billion• 80% ownership• a spill over effect• Stock increase of 1%.• Banks AIG paid that they owed money to: (1.) Goldman Sachs (2.) Merrill

Lynch (3.) Bank of America (4.) Citigroup (5.) Wachovia

Fall 2010 Market UpdateCoconut Grove• Average Asking Price$600,000• Average Price Compared to Last

Year: Down 15-20%• Average Time on Market: More

than 120 days (≈5 months)• Prices As % of Asking Price: 85-

90%• Market Trend: Increasing• Buyers’ or Sellers’ Market: More

buyers than sellers• Multiple Offers: No• Housing Inventory: Good supply -

Some Prices

http://www.househunt.com/realestate-markettrends/FL/

Coral GablesAverage Asking Price$500,000Average Price Compared to Last Year: Down 15-20%Average Time on Market: 60-90 days (≈2-3 months)Best Selling Price Range$350,000 - $399,000Prices As % of Asking Price95-100%Market Trend: DecreasingBuyers’ or Sellers’ Market: More sellers than buyersMultiple Offers: YesWhat Percentage of the Current Housing Inventory are Foreclosures and/or Short Sales? 5-10%

"Despite the slight bump in mortgage rates, banks have increased the origination of jumbo mortgage loans by 20 percent during the second quarter. Small regional banks as well as lending giants, such as J.P. Morgan Chase, are providing jumbo mortgage loan borrowers with more options to purchase higher-valued homes. Moreover, options are not limited to new purchases, but include jumbo mortgage refinances, too.“

http://ml-implode.com/staticnews/2010-11-30_JumboMortgagesJumboMortgageLendingImprovesby20.html

Investopedia explains Jumbo LoanJumbo loans are often securitized by institutions other than Fannie Mae or Freddie Mac. These securities carry more credit risk than those issued by Fannie Mae or Freddie Mac, and therefore, trade at a yield premium which translates into slightly higher interest rates. However, in recent years the spread in interest rates between jumbo and conventional mortgages has been reduced.

WikipediaIn the United States, a jumbo mortgage is a mortgage loan in an amount above conventional conforming loan limits. This standard is set by the two government-sponsored enterprises Fannie Mae and Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages. When FNMA and FHLMC limits don't cover the full loan amount, the loan is referred to as a "jumbo mortgage". The average interest rates on jumbo mortgages are typically higher than for conforming mortgages.

Discussion Question

We saw the harmful effects of subprime lending and the harm it caused our economy, now we’re gradually seeing banks shift toward more aggressive lending practices. Do you think it would be beneficial for banks to lend more, less, or not at all during the current economic downturn?

Bibliography• Slide 7:

http://www.investopedia.com/articles/economics/08/government-financial-bailout.asp

• Slide 8: http://www.nytimes.com/2008/09/17/business/17insure.html?scp=1&sq=Fed%20Readies%20A.I.G.%20Loan%20of%20%2485&st=cse

• http://www.nytimes.com/2009/03/15/business/15AIG.html?_r=1&scp=5&sq=AIG&st=cse

• http://www.nytimes.com/2009/03/16/business/16rescue.html?scp=23&sq=AIG&st=cse