Assignment for next week
• Each – pick a country
• Research what that country is doing to
remedy problems raised by financial crisis.
• EXTRA CREDIT: prepare a synopsis of what you
find. One page – bullet points!
OFFICE: Rm. 1047
[First Floor of this
Building]
Ofc. Hrs?
Couple of misc. concepts before
moving on…
• Escrow:
• HYPOTHETICAL:
Seller owns an apartment bldg. – FMV = $3 mill.
Lender #1: 1st mortgage with = $1 million (bal. due)
Lender #2: 2nd mortgage = $400,000 (bal. due)
Judgment recorded vs. X in amt. of $100 k
Buyer - contracts to buy X’s bldg. for $3 million.
Escrow opens
Lender #1: 1st mortgage with = $1 million (bal. due)
Lender #2: 2nd mortgage = $400,000 (bal. due)
Judgment recorded vs. X in amt. of $100 k
•
•
•
•
•
Buyer will borrow $2.3 million from Wells Fargo Bank.
What does Buyer ultimately want?
What does Wells Fargo want?
How will Wells Fargo gets what it wants?
What will happen to Lender #1 and #2?
ESCROW INSTRUCTIONS
• Pgs. 54-55 of materials
• Duty of escrow officer
• Ultimate result:
• Title Insurance Policy
The Global Financial Crisis
Impact on other countries
What did you learn from the
assignment for today?
• This American Life: (2008) Giant Pool of
Money –or- some other program?
Secondary mortgage market - pg. 49
•
•
•
•
•
What is it?
Why does it exist?
Mortgages sold by originators
Packaged into mortgage-backed securities
Sold to investors
Four major participants in Secondary
Mtg. Market
• Who are they?
• Mortgage originator
• Aggregator: large mortgage
originators with ties to Wall Street
firms and government-sponsored
enterprises (GSEs), like Fannie Mae and Freddie Mac.
• Securities dealer: Most Wall Street brokerage firms
have MBS trading desks.
• Investor
Mortgage Backed Securities (MBS)
• STEPS (Investopedia):
• Real estate buyers borrow from financial
institutions.
• Financial institutions sell mortgages
to MBS entities.
• MBS entities form mortgage pools.
• Individuals invest in mortgage pools.
Types of MBS
• Pass-through or participation certificate
– Direct ownership in pool of mortgages
– Get pro rata share of all pymts made
– Prepayment – affects yield
• Collateralizated Mortgage Obligation (CMO)
– Pools of pass-through mortgages:
Pass-Through Securities
CMO Issuer
Individual Investors
Sequential Pay Collateralized Mortgage
Obligation (CMO)
• CMO issuers - distribute cash flow to bondholders
from a series of classes, called tranches.
• Each tranche holds mortgagebacked securities with similar
maturity and cash flow patterns.
• CMO issuer – 1st pays stated coupon interest rate
to bondholders in each tranche. Principal
payments go first to the investors in the first
tranches. Once they are paid off, investors in later
tranches will receive principal pymts.
Who are the investors in Mortgage
Backed Securities?
•
•
•
•
•
Foreign governments
Pension Funds
Insurance Companies
Banks
Hedge Funds – sophisticated investors
– U.S. – must be accredited (certain income/net
worth)
– Speculative investments/large risk
Housing bubble burst – 2006/2007
• Value of securities tied to U.S. Real Estate
• Qs re/ bank solvency, credit availability,
Investor confidence
Caused global stock markets to plummet
2008/2009
Credit – tightened; trade slowed
Example: BNP Paribas
• Aug. 9, 2007: "a complete evaporation of
liquidity", blocked withdrawals from three
hedge funds. The significance of this event
was not immediately recognized but soon led
to a panic as investors and savers attempted
to liquidate assets deposited in highly
leveraged financial institutions.
• BNP Paribas is one of the world's largest
global banking groups, headquartered in Paris,
with its second global headquarters in
London.
• In 2012, BNP Paribas was ranked by
Bloomberg and Forbes as the fourth largest
bank in the world, as measured by total
assets.
CREDIT DEFAULT SWAP (AIG)
• Explain
• Insured obligations of fin. institutions
• AIG received premium in exchange for promise to
pay $ to party A if party B defaulted
• U.S. govt. had to bail it out –
taxpayers provided over
$180 billion to AIG (2008/09)