2008 Housing Crisis

What is a mortgage backed security?

• Bundling 1000s of mortgages together into a single bond.

• Mortgaging a home to use as collateral.

• A security you can only buy if you currently have a mortgage.

• a share of a company.

Eventually, banks ran out of good mortgages to place into mortgage backed securities (MBSs). How did they continue to produce MBS bonds?

• Banks reused mortgages they had already put into an MBS.

• Banks manufactured loans using the identities of dead people.

• Banks filled the bonds with subprime mortgages.

• They couldn't sell MBSs anymore which led to a severe loss of income, resulting in the 2008 economic crisis.

What is a subprime loan?

• The loan before optimus prime.

• A loan with a slightly higher interest rate. Made for clients with mediocre credit.

• A irresponsible loan to someone with a poor credit score.

• A loan cheaper than the prime rate, therefore making the interest rate the best interest rate available.

Given the choice, do you want a fixed rate mortgage or an adjustable rate mortgage?

• Fixed Rate

• Adjustable Rate

All the subprime mortgages were adjustable rate mortgages. Which describes how an adjustable rate mortgage works?

• A high starting interest rate that gets lower over the life of the loan.

• A low starting interest rate that gets higher over the life of the loan.

• A high starting interest rate that remains high throughout the life of the loan.

• a low starting interest rate that remains low throughout the life of the loan.

What did banks do with the high risk B-rated bonds of mortgages they couldn't fit into a MBS?

• The banks offered higher coupon rates to incentivize investors.

• The banks were sad they couldn't sell the bonds and took the loss.

• The banks sold the bonds to Michael Milken, the Junk bond king.

• The banks repackaged the risky bonds together as a collateralized debt obligation (CDO).

Banks put a lot of faith in collateralized debt obligations (CDOs) as safe bonds. CDOs of mortgages received 92% triple A ratings. Why were CDOs actually bad investments?

• Collateralized means the buyer needs to offer collateral to purchase the bond.

• Even though a CDO is made of diversified assets, all the assets are risky garbage. A pile of diverse garbage isn't any better than a regular pile of garbage.

• Only investments that receive a 100% triple A rating are good investments.

• Buying debt is always a bad investment.

Synthetic CDOs pay out depending on if other CDOs pay out or collapse. Supposing there is 1 million dollars worth of CDO bond F, about how much money is there in synthetic CDOs betting whether F will pay out?

• 1 million dollars

• 7 million dollars

• 20 million dollars

• 100 million dollars

In the years leading up to 2008, were the ratings agencies like Moodys and Standard & Poore accurately evaluating bonds involving mortgages?

• Yes, they were accurately evaluating the bonds.

• No, they were not accurately evaluating the bonds.

• Bears?!

Once MBSs and CDOs zeroed in 2008, the US government issued a bailout to the banks. Check off all the things that happened in the USA as a result of the bailout.

• Most big banks stayed in business

• Many bankers went to prison.

• The ratings agencies executives were convicted of fraud

• Bank executives took the bailout money and paid themselves bonuses.

• The housing market crash resulted in a 5 trillion dollar loss to the economy