Real Estate and Financial Crisis Quest

Mortgage

Loan b/w borrower (you) and lender (bank) to purchase house

• Lender has right to take property/ foreclose if borrower defaults

Principal

Actual amt of $ borrowed

Interest

Cost of borrowing $ (extra you have to pay)

Monthly Mortgage Payments

Amt pay per month

• Usually includes principle, interest, tax and insurance (PITI)

Down payment

Upfront cash before loan

Term

How long pay back loan

• Usually 15 or 30 yrs

Typical process of buying house ex.

1. Apply for mortgage for ($500,000) house at bank (pre-approval)

2. 0-20% downpayment ($100,000)

3. Pay off mortgage loan (30 yrs, 3% fixed for $400,000)

   1. Borrower own house while paying loan

   2. Can sell house at any time, but must pay bank what borrowed

   3. (30) ys * 12 payments/ yr → (360) payments

      1. $(1686)/ month doesn’t change, but interest goes down and payment towards loan increases as time goes on

Investment property ex.

• Buy $500,000 4 unit property w/ $125,000 downpayment and $375,000 loan → live in 1, rent 3 all paying $1000/month → live there for free, use 2 to pay loan, use 1 as passive income

  • Risky b/c have to find tenants and fix building problems

The best time to buy a house is…

5 years ago

What’s something you learned from Gen Z and Homeownership vid?

• Homeownership rate for gen Z by age 24 was slightly higher than that of both milleneals and Gen X, despite the lower incomes, limited housing inventory and greater interest rates.

• Gen Z is moving to more midwestern areas, with cheaper home prices, while millennials often opted for more expensive urban areas, allowing Gen Z to get homes earlier in their lives.

Who was the person in the Make It video, how much did they make, and what’s one thing you found interesting?

• Trevor

• Cambridge

• $100k

• No consistent job (tutored)

• Kept fixed amt in checking ($4000) and put extra in savings

Info on your million dollar listing

• Orlando

• $3,750,000

• Down payment: $750,000

• Monthly property tax: $6656

• Monthly payment: $18,277

Eron (2001)

Executives used fraud accounting practices to hide losses and lie abt revenue

Bernie Madoff

2009: Stole investors $ through ponzi scheme and stock/ securities fraud practices

• Ponzi scheme: returns to earlier investors using money from newer investors, rather than from actual profit earned

• Markapolos, a Boston forensic accounting investigator, cracked open case

What led to the 2008 financial crisis

Local banks give $ to people who couldn’t afford it (subprime mortgages) → sell to investments banks → bundle and sell to investors as mortgage backed securities, while insuring loans → wanted more → local banks loosened standards → people default → insurance can’t afford to pay and for sale houses w/ no buyers → house prices fall → borrowers own home for more than worth → big banks stuck w/ securities no one wants to buy

Mortgage backed securities

Bond secured by bundle of home loans

Credit default swap

Insurance sold against default of Mortgage Backed Securities

• No $ to back up policies if something went wrong

• Ex. AIG for Lehman Bros before financial crisis

FANNIE MAE

Federal National Mortgage Association

• Made in 1983 during Great Depression

• Buy mortgages from banks to help bankers lend out more mortgages

• Gov’t sponsored enterprise (GSE)(private company backed by US gov’t)

  • In 2008 GSEs bought “low risk” mortgage backed securities, while big banks bought and created “higher risk” investment tools

FREDDIE MAC

Federal Home Loan Mortgage Coporation

• Made in 1970 to compete w/ FANNIE MAW and extend mortgages

• Also buys mortgages from banks to help banks lend more mortgages

• Also a GSE

T.A.R.P.

• Troubled Asset Relief Program

• $700B injected into big banks labeling them as “too big to fail”

• Proposed Sept. 18th 2008, passed Oct. 13th 2008

Who was your favorite character in the screenplay “The Big Collapse”

Local banker Bob

What’s something that surprised you in the video “Panic: The Untold Story of the 2008 Financial Crisis”

Stated income loans (aka “liar loans.”) → people could just make up how much income they were making to get loans they couldn’t afford.

Hank Paulson

US Treasury Secretary in 2008

• Goldman Sachs CEO

• “Bailout king”

Tim Geithner

Fed Chair of NYC in 2008

Ben Bernanke

Fed Chair of US in 2008

March 16th 2008: After the Fed bought all bad assets, which bank did Bear Stearns sell to?

JPMorgan Chase

July 15th 2008: After Fannie Mae and Freddie Mac see large defaults what did Secretary Paulson ask Congress for?

• “Bazooka”

• “Blank check”

What happened on Sept 15th 2008?

• Emergency meeting US Treasury and major US banks

• Bank of America buys Merrill Lunch

• Barclays bank denies purchase of Lehman Bros

• Lehman Bros fails overnight

Sept 23rd 2008: Which presidential candidates paused campaign to help solve financial crisis?

Obama and McCain

Oct 1st 2008: As Main St. starts to fail and people lose homes, what 2 big financial institutions start to fail?

Wachovia and Washington Mutual

Feb 19th 2009: Who got rich after mortgage mess?

Big bank excecutives