Former U.S. Secretary of the Treasury Timothy F. Geithner and Professor Andrew Metrick survey the causes, events, policy responses, and aftermath of the recent global financial crisis.
Lecture: Nonprime Mortgages
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Из курса от партнера Yale University
The Global Financial Crisis
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Andrew MetrickMichael H. Jordan Professor of Finance and Management
Yale School of Management
Timothy GeithnerLecturer in Management, Yale SOM, Former U.S. Secretary of the Treasury
Yale School of Management
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All right, if we have prime mortgages, the other type of mortgage must be Nonprime.
They're Nonprime, and they fall into a bunch of different categories.
There's two categories that you'll hear a lot about
when people discuss the financial crisis.
The first is subprime, and
here unfortunately, there's not a perfect definition.
So let me give you one that is useful.
And this is in quotes cuz it's taken directly from a paper by Mayer,
Pence and Sherlund.
Although categories are not rigidly defined, subprime loans are generally
targeted to borrowers who have tarnished credit histories and
little savings available for down payments.
Now you can be missing any of the earlier categories that will make something
conforming other than the size of the loan.
Typically though it's credit score or
it's income that will be less than what's necessary for a conforming loan.
So subprime loans are just going to be by their nature even in the absence of
any government guarantee one way or the other they're going to be riskier.
They're going to be riskier because the underlying borrower has less of a credit
history and has less room to be able to make their payment.
So we're gonna expect them to be a little bit riskier, but at the same time,
the government can't be involved in actually guaranteeing them.
So even if they were just the same level of riskiness, as a prime loan,
they would lack a government guarantee.
Another term that you will hear, which is unfortunately even less precisely defined,
is near-prime, or the term of art has grown up to be Alt-A.
So you hear it called Alt-A and
from that same source, here's what we would call an Alt-A loan.
Near-prime mortgages are made to borrowers with more minor
credit quality issuers or borrowers who are unable or
unwilling to provide full documentation of assets or income.
So in some cases, the most common example you'll hear of this
are small business owners who perhaps
can't give you a W2 the same way that an employee can to demonstrate their income.
The bank might view them as being really quite a safe borrower,
similar to other prime borrowers, but
because they're unable to produce the documentation necessary to
get a conforming loan, they're still going to be considered nonconforming.
I'll go by the terms nearprime or this term of art in the market of Alt-A.
Together we're gonna lump sub prime and
alt a into a category that we're going to call nonprime.
Nonprime mortgages, they're not new products around for
a while, but they exploded in the 2000's.
Here's a picture.
You see that the line is giving the subprime share of the entire market and
that's labeled along the line.
So in 1996 the subprime share of the market,
this is just subprime, it does not include Alt-A.
The subprime share of the market was 9.5% and it stayed relatively steady
even dipping slightly over the next seven years before starting to grow rapidly.
And in the period from 2003 to 2006,
we see it grow from 8.3% of the market to 23.5% of the market.
And this is a time where the market itself is growing rapidly.
So the total amount in dollars of subprime loans, that's the height of the bars.
And the height of those bars show that the total amount was
below $100 million dollars a year, 1996 and 1997.
Growing to about $200 billion in 2002, and then really exploding,
reaching the peak above $600 billion in 2005,
before falling off dramatically in 2007 and 2008.
Those bars are split into two different groups.
And this is something that we will talk more about in future modules,
which is the difference between securitized and non-securitized loans.
The most important thing to note here is that the majority of the growth
from 2003 to 2007 was in securitized subprime loans.
The subprime loans would be made by the banks and then bundled into securities and
sold to investors.
It was an enormous growth, and it plays a large role both in popular narratives and
in the reality of what went in the lead up to the financial crisis.
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