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?
Slide 2
Couple of misc. concepts before moving on Escrow: HYPOTHETICAL:
Seller owns an apartment bldg. FMV = $3 mill. Lender #1: 1 st
mortgage with = $1 million (bal. due) Lender #2: 2 nd mortgage =
$400,000 (bal. due) Judgment recorded vs. X in amt. of $100 k Buyer
- contracts to buy Xs bldg. for $3 million.
Slide 3
Escrow opens 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? Lender #1: 1 st mortgage with = $1 million (bal. due)
Lender #2: 2 nd mortgage = $400,000 (bal. due) Judgment recorded
vs. X in amt. of $100 k
Slide 4
ESCROW INSTRUCTIONS Pgs. 54-55 of materials Duty of escrow
officer Ultimate result: Title Insurance Policy
Slide 5
The Global Financial Crisis Impact on other countries
Slide 6
What did you learn from the assignment for today? This American
Life: (2008) Giant Pool of Money or- some other program?
Slide 7
Secondary mortgage market - pg. 49 What is it? Why does it
exist? Mortgages sold by originators Packaged into mortgage-backed
securities Sold to investors
Slide 8
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.Fannie MaeFreddie Mac
Securities dealer: Most Wall Street brokerage firms have MBS
trading desks. Investor
Slide 9
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.
Slide 10
Slide 11
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 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
Slide 12
Sequential Pay Collateralized Mortgage Obligation (CMO) CMO
issuers - distribute cash flow to bondholders from a series of
classes, called tranches.tranches Each tranche holds mortgage-
backed securities with similar maturity and cash flow patterns.cash
flow CMO issuer 1 st 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.
Slide 13
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
Slide 14
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
Slide 15
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.
Slide 16
BNP Paribas is one of the world's largest global banking
groups, headquartered in Paris, with its second global headquarters
in London. global bankingParis London In 2012, BNP Paribas was
ranked by Bloomberg and Forbes as the fourth largest bank in the
world, as measured by total assets. BloombergForbeslargest
bank
Slide 17
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)