Sub-prime crisis - the demon

1. NOTE ON SUBPRIME LENDING
ITeS Vertical – Notes September 08
Confidential
ITeS Vertical

2. SUB PRIME LOAN
A type of loan that is offered at a rate above prime to individuals not qualifying for
normal loan
Subprime borrowers are often turned away from traditional lenders because
of their low credit ratings
Subprime loans tend to have a higher interest rate than prime rate offered on
traditional loans
Different lenders charge different rates in subprime loan

3. BASIC TYPES OF SUB PRIME LOANS
Pay
Pay
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Loa
Op
Op
nl y
tion
tion
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Types of
Lo
Loa
ere
ans
Subprime
ns
Int
Mortgages
Hybrid Mortgages

4. BASIC TYPES OF SUBPRIME LOANS
Interest-only payments, borrowers pay only interest for a period of 5-10 years
"pay option" loans, are adjustable rates, borrowers choose their monthly payment
(full payment, interest only, or a minimum payment )
and so-called "hybrid" mortgages with initial fixed rates that sooner/ later convert
to adjustable rates; includes the "2-28 loan", which offers a low initial interest rate
fixed for two years

5. PARTICIPANTS & BENEFITS

7. HOME
OWNER
INDIVIDUALS,
LENDER/ TRUST/ PENSION FUNDS,
MORTGAGE TRUSTEE UNDERWRITER
CONDUIT INSURANCE
BROKER
COMPANIES
SERVICER
Participants in the Subprime Loan

8. LENDERS PROFILE IN SUBPRIME LOAN
Lenders take risks associated with lending to people with allegedly poor credit
ratings
Subprime loans carry a far greater risk for the lender due to the credit risk
characteristics of typical subprime borrower
Lenders offset the risk with a higher interest rate
Subprime customer may be charged higher late fees, higher over limit fees, yearly
fees, or up front fees for the card

9. CRITERIA BASED – BORROWER PROFILE
Not more than 2 or
Non Bankruptcy in more loan
the last 7 years payments in the
last 30 days
BORROWERS
PROFILE
Accurate credit
A credit score of lined data by the
not less than 620 underwriter

10. Borrowers- Access to Investors-
credit despite poor Opportunity to
credit history diversify
Portfolio
Mortgage Originator-
Makes money by the
difference between the PARTICIPANTS Greater integration for
interest of the market
financial and capital
and the premium
charged to the borrower & markets
BENEFITS
Securities Dealer- Makes Source of funds for
money by selling the banks and other
securities and charging institutions
commission on the
underwriting
BENEFITS TO THE PARTICIPANTS IN SUBPRIME MARKET

11. EFFECTS OF SUBPRIME LOANS

12. Subprime Loan
Late
Possession, High Rate
Charge offs
and
Bankruptcy Repercussions
Subprime Loan Preclusion from
Obtaining any Type Subprime Loan
of Conventional
Loan
Effects of Subprime Loan

13. IN THE CONTEXT OF U.S. SUBPRIME MARKET SCENARIO
1. In late 2006, the U.S. subprime mortgage industry saw a shift that was referred as a
meltdown
2. Steep rise in the rate of subprime mortgage defaults has caused more than 100
subprime mortgage lenders to fail or file for bankruptcy
3. The failure of companies has caused prices in the $6.5 trillion mortgage backed
securities market to collapse, threatening broader impacts on the U.S. housing
market and economy as a whole
4. The crisis is ongoing and has received considerable attention from the U.S. media
and from lawmakers during the first half of 2007

14. EFFECTS OF SUMPRIME CHALLENGES
Effect on Home Owners - As home prices have declined caused by speculation re-
financing standards have tightened
Effect on Jobs of the Financial Sector
According to Bloomberg, from July 2007 to March 2008 financial institutions laid off
more than 34,000 employees. In April, Citigroup announced an extra 9,000 layoffs for
the remainder of 2008
In April, Merrill Lynch planned to terminate 2,900 jobs by year end. At Bear Stearns
fear is that half of the 14,000 jobs could be eliminated once JP Morgan completes
acquisition
Effect on Minorities- About 46% of Hispanics and 55% of African Americans who
obtained mortgages in 2005 got higher-cost loans compared with about 17% of whites
and Asians
Effect on Tenants - Many renters have been forced from their homes by foreclosures
due to their landlords defaulting on loans

15. EFFECTS OF SUBPRIME MARKET
Effect on Stock Markets
Investors have taken their money out of risky mortgage bonds/ shaky equities and put it
into commodities as "stores of value"
Effect on Financial Institutions
ICICI, India's second largest bank, has reported loss of $263 million in loans/ investment
exposures
Effect on Insurance Companies
There is concern that some homeowners are turning to arson as a way to escape from
mortgages they can't or refuse to pay
Effect on Municipal Bond “Monoline" Insurers
A secondary cause and effect of the crisis relates to the role of "monoline" insurance
corporations; Ambac and MBIA. By insuring municipal bond issues, those bonds achieve
higher debt ratings

16. US SUBPRIME CRISIS – INDIA IN CONTEXT

17. MACRO INDICATORS
Increased Interest Rates
Cyclical nature of the real estate market
Stagnation of the Housing prices
Share Prices dipped considerably
Loan Write Offs
Decision Making Process Investment Bank Rectification at Beginning of the
Plans on Hold the base level Subprime Mess
Purchase Occasion
Buyer Behavior
Functional Needs
Systems Economics

18. FEEL FACTOR OF SUBPRIME CRISIS ON INDIAN ECONOMY
India should escape major fallout from the US sub prime credit turmoil
It remains far less exposed to global financial upheaval than many countries
India appears to be in a strong position to withstand aftershock as the country has
largely a domestically driven economy with limited trade dependence
India's banking sector is not directly exposed to sub prime woes unlike some banks in
Britain, Germany and elsewhere

19. Continued…
A possible US economic slowdown could hit budgets of cost-conscious firms, but this
accounts for only 5.4 percent of India's GDP.
Some insist that subprime upheaval could cause a "significant" slowdown, as "Global
risk" has been at the heart of India's current growth acceleration cycle
However, if the current global risk aversion trend continues for more than three
months, India could face a significant deceleration in growth
It all boils down to international integration our growth story is still one mainly of
domestic demand.

20. MAJOR COMPANIES THAT HAVE MORTGAGE PROCESSES

21. Various Positions in Mortgage Processing
EXECUTIVE/ORIGINATION
Executive Management
Origination Channels
Retail
Telemarketing
Wholesale
SECONDARY/CAPITAL MARKETS
Loan Portfolio Management
Loan Securitization/Loan Pooling
Pricing
Quantitative Analysis
Sales/Investor Relations
Secondary/Capital Markets

22. Continued…
Management
Secondary/Capital Markets Support
Trading
OPERATIONS/SERVICING AND
INFRASTRUCTURE
Customer Service
Finance
Loan Operations
Loan Workout
Marketing & Communications
Quality Control/Compliance
Risk Management
Technology
Underwriting

23. Company- Mortgage Processing
AEGIS MORTGAGE CORPORATION
AEGON USA REALTY ADVISORS, INC.
AMERICAN GENERAL FINANCE
AMERICAN HOME MORTGAGE
AMTRUST BANK
ARVEST BANK OPERATIONS
ASSURITY FINANCIAL SERVICES LLC
ASTORIA FEDERAL SAVINGS
AURORA LOAN SERVICES
AVELO MORTGAGE, LLC
BANK OF AMERICA
BANK OF MONTREAL
BANK UNITED
BARCLAYS CAPITAL GROUP
BMO FINANCIAL GROUP
BNC MORTGAGE, INC.
BRANCH BANKING & TRUST CO.
CENLAR
CHEVY CHASE BANK
CITI CONSUMER LENDING GROUP

24. D.B. HOME LOANS
DOWNEY SAVINGS & LOAN
EMC MORTGAGE
EQUIFIRST
EVERBANK
FANNIE MAE
FIFTH THIRD BANK
FIRST FRANKLIN (MERRILL LYNCH)
FIRST TENNESSEE BANK/ FIRST HORIZON HOME LOANS
FIELDSTONE MORTGAGE COMPANY
FREDDIE MAC
GMAC
HOMESTREET BANK
HOMEQ SERVICING
HSBC BANK USA
HUNTINGTON BANCSHARES INCORPORATED
INDYMAC BANK
ING MORTGAGE
JOHNSON FINANCIAL GROUP, INC.
JP MORGAN CHASE
HOVNANIAN ENTERPRISES, LLC
KEYCORP
KH FINANCIAL, L.P.

25. DIVISION
LENDINGTREE, INC.
LINCOLN MORTGAGE COMPANY
LITTON LOAN SERVICING LP
M & T BANK
MARKET STREET MORTGAGE CORPORATION
MARRIOTT VACATION CLUB INTERNATIONAL
MDC HOLDINGS, INC.
MIDFIRST BANK
MORGAN STANLEY HOME LOANS
MORTGAGE GUARANTY INSURANCE CORP.
NATIONAL COOPERATIVE BANK
NATIONAL CITY CORPORATION
NATIONWIDE INSURANCE
ONE WASHINGTON FINANCIAL, LLC
OPTEUM FINANCIAL SERVICES, LLC
OPTION ONE MORTGAGE
PHH MORTGAGE
PLAZA HOME MORTGAGE, INC.
RBC FINANCIAL GROUP
REGIONS FINANCIAL CORPORATION
RESMAE MORTGAGE CORP
SAXON MORTGAGE (MORGAN STANLEY)
SCME MORTGAGE BANKERS INC.
SHEA FINANCIAL SERVICES

26. CITIMORTGAGE
CITIZENS BANK
COLORADO HOUSING FINANCE AUTHORITY
COMPASS BANK
SN SERVICING CORPORATION
SOVEREIGN BANK
STERLING SAVINGS BANK
SUNTRUST BANK, INC.
SYNOVUS FINANCIAL CORPORATION
TECHNOLOGY CREDIT UNION
TITLE RESOURCE GROUP
THORNBURG COMPANIES
UNION BANK OF CALIFORNIA
UNIVERSAL AMERICAN MORTGAGE CO., LLC
USAA
WACHOVIA CORPORATION
WASHINGTON MUTUAL
WEBSTER BANK
WELLS FARGO HOME MORTGAGE
WILSHIRE CREDIT CORPORATION (MERRIL

27. Companies in India
1. Accenture 1. Infosys
2. ACS 2. iSeva
3. Adventity
3. Karvy
4. Aegis
5. Capgemini 4. Motif
6. Cognizant 5. Nipuna BPO
7. e4e 6. Ocwen
8. Group,Equinox 7. Office Tiger (RRD),
9. iflex
8. Quattro BPO
10. EXL Service
11. Fidelity National Information 9. Sutherland
Services, 10. TCS
12. First Source 11. Trans works
13. Fiserv
12. Aditya Birla
14. Genpact
15. HCL BPO 13. US Technology Global
16. Hexaware 14. Wipro
17. IBM Daksh 15. WNS Global
18. iGATE 16. Xansa
19. Indecomm
17. Zenta

28. MORTAGE PROCESS IN INDIAN BPO COMPANIES
1. Loan Processing &Underwriting
2. Document Procurement
3. Rate Lock Management
4. Employment Verification
5. Automated Underwriting
6. Document Preparation
7. Credit Review
8. Good Faith Estimate
9. Loan Process Indexing
10. Rate Quotes
11. 1003/1008 Input,
12. Phone Based Qualifications
13. Order Appraisal
14. Title Hazard & Flood, Closing & Funding
15. Trust/Deed Agreement Review
16. Cross Selling
17. Lead Generation
18. Review of Compliance & HOI Documents

29. CONTINUED..
MORTGAGE BANKING BPO: servicing management includes outsourced tasks of :
1. Loan Boarding
2. Escrow Analysis
3. Taxes
4. Insurance
5. Lien Release
6. Loss Mitigation
7. Payoff
8. Commercial Mortgages
9. Early Collections
10. New Loan Audit
11. Skip Tracing
12. Welcome Calls
13. ARM Audits
14. Default Loan Setup

30. MEASURES TAKEN TO MANAGE THE CRISIS

31. MEASURES
The Federal Reserve
In August 2007, Federal Open Market Committee announced that interest rate cuts
might be forthcoming
The Fed is utilizing the Term auction facility (TAF) to provide short-term loans
(liquidity) to banks
In March 2008, the Fed also provided funds and guarantees to enable bank J.P.
Morgan Chase to purchase Bear Stearns
Loan modification
Lenders /homeowners both benefit from avoiding costly and lengthy foreclosure .
Litigation
Litigation related to the subprime crisis is underway. A study in February 2008
indicated that 278 civil lawsuits were filed in federal courts during 2007 related to
the subprime crisis.

32. MEASURES
Media
Media can help educate the public and parties involved by ensuring the top subject
material experts engaged
Bank Financial Health
Certain major banks have reduced their dividend payouts to increase liquidity
Credit Rating Agencies
They are taking action to address perceived or actual conflicts of interest, including
additional internal monitoring programs, third party reviews of rating processes, and
board updates
Regulation
Regulators are considering action regarding lending practices, bankruptcy protection,
tax policies, affordable housing, credit counseling, education and the
licensing/qualifications of lenders

33. Thank You !