The Mortgage Crisis n PLS 480 Greed and

The Mortgage Crisis n PLS 480 Greed and Need n Dr. Emerson

Sub Prime Problem n Delinquency rate 2 tenths of 1 % in 1979 n Today 2% (10 times higher) n Moyer’s Report http: //www. pbs. org/moyers/journal/071820 08/watch. html

Context: Regulate or Deregulate n n n Constitution requires Congress regulate banks Congress leaves regulation to States. In 1913 FED authorized by Congress.

Little Regulation Until New Deal n n n Unregulated stock market Bank’s heavily invested in stocks Deposits not insured

Regulation n n Glass Steagall Act FDIC n Security & Exchange Commission Freddie Mac/ Fannie Mae n HUD in 1960 s n

Deregulation n Deregulation of S&Ls No regulation of “derivatives” Mortgages may be sold in fractions.

Deregulation Continues n Savings/Loan Scandal n Congress repeals Glass Steagall Act in 1999.

Federal Reserve Bank Policies n n Low interest rates Sub primes unregulated No regulation of ‘innovative financing’ No action regarding defaults

What is market response? n n n Over price houses Piggy back sub primes with regulated ‘primes’ Little or no documentation of house/buyer

GAO Report ¨ No piggyback and documentation 0% defaults ¨ Piggyback OR little documentation 25 -31% ¨ Piggyback AND no documentation = 60%

Why No Demands by Lenders? n Don’t know‘decoupling’ n If fail then resell at higher price n Loan is asset not borrower’s capacity to repay

Evidence Mortgage type and loss to homeowner and investor (Mortgage Banker Association) n Spillover of Mortgage Subprime to Prime trends (First American Loan Performance) n Stock Market Performance (Dow Jones Industrial Average) n Jobs (Bureau of Labor Statistics) n Recover of US (OECD) n

Foreclosures By Mortgage Type Which type serves mortgage buyer AND homeowner? n Difference between red bar, green and yellow? n

Relationship of Prime to Sub-prime Spillover of subprime default on prime. n Top line =subs but bottom line =primes n

Stock Market Learning Curve Dips and peaks in stock market performance 2000 - July 2009 n Prior dip July 2003. Why? n

JOBS n Impact of policies on jobs (Bureau of Labor Statistics)

Recovery Comparison US System Recovery versus other Industrialized Democracies n Red line US vs. France, Germany and Japan (OECD) n

Break n Be back in 10 minutes for the analysis

Finish this lecture: (7 groups) 1. 2. 3. 4. 5. 6. 7. Dem. Capitalist –explain Dem. Capitalist –policy opt. Dem. Socialist—explain Dem. Socialist – policy opt. Conservatives interpretation Liberal interpretation Madison interpretation/options

Democratic Capitalists Explain n Democratic Capitalist explain evidence ---

Democratic Capitalists n Future Policy Preference n Reasoning

Democratic Socialist n Democratic Capitalist explain evidence ---

Democratic Socialist n Future Policy Preference n Reasoning

Conservative n Interpretation of Evidence and Meaning

Liberal n Interpretation

Madison Model Interpretation/ Explanation n Policy Options n

Conclusion n Justice is the end of government. It is the end [purpose] of civil society. It ever has and ever will be pursued until liberty is lost. . Madison, FP 51

Citations n Alford, Rob (2003). What are the origins of Freddie Mac and Fannie Mae. Accessed August 28, 2008 at http: //hnn. us/articles/1849. html. n Bitner, Richard (2008). Inside the Subprime Debacle. U. S. News and World Report. 145 (2) 12. n GAO Report (2007) Briefing to the Committee on Financial Service, House of Representatives. GPO: Washington, D. C.

Citations n Jost, Kenneth (2008). Financial Crisis. CQ Researcher 18(18), 409 -422 n Phillips, Kevin (2002). Wealth and Democracy. New York: Random House. n Reynolds, Maura. (2008). Mortgages: Loan troubles hit new heights: foreclosure rate climbs to 2% for the 4 th quarter. Home equity drop. Los Angeles Times. C-1.

Q and A

Postscript n Define issue Use Library Resources, no Wikipedia (https: //blackboard. csupomona. edu/webap ps/login/) n See http: //www. csupomona. edu/~library/datab ases/politicalscience. html n

Postscript (cont. ) Use correct APA citations. See: http: //owl. english. purdue. edu/owl/resource /560/01/ n Looking for: timely, data (e. g. GAO), both sides of issue. NOT http: //www. hillbillyreport. com/blog/bear_st earns// n

Postscript (cont. ) n n Analysis: Freedom, Liberty, Reason and Justice Conclusions and Opposition argument Power Point: Common Errors (http: //www. youtube. com/watch? v=HLpjr. Hzg. SRM) versus http: //www. youtube. com/watch? v=v. XFi 7 Adhh. Gk&f eature=related (good example) n

Sub-prime mortgages The end