To Loan or Not to Loan A Subprime Dilemma The Leftovers: Kyle Suffolk Miranda Taylor Andrew Vaughn Johan Wislander Anzhelika Zaborskikh

Credit Scores Johan Federal Reserve Kyle Financial Analysis Anzhelika Strategic Considerations Andrew Ethical Issues Miranda Recommendation

Regression Relationships The Leftovers: Johan Regression Relationships Negative Relationship Low Credit Score = Many Days Delinquent High Credit Score = Few Days Delinquent

Regression Relationships The Leftovers: Johan Regression Relationships Coefficient of Determination R-Square: 0.926 or 92.6 % Credit Scores explain 92.6 percent of the movement of Days Delinquent

Credit Score: Average Delinquent of 90 days The Leftovers: Johan Credit Score: Average Delinquent of 90 days Loans are likely to be foreclosed if they pass 90 days delinquency We can find the average credit score for 90 days delinquent by using our regression equation. Y = 203.65 - 0.255x 90 = 203.65 – 0.255 * Credit Score Credit Score = 446

Credit Score: Average Delinquent of 90 days The Leftovers: Johan Credit Score: Average Delinquent of 90 days Normal Distribution Bell Curve Symmetric Distributed 50 percent of the people with credit score of 446 are likely to be 90 or more days delinquent Days Delinquent

Subprime Loans Prime Loans (Credit Score 640 and up) The Leftovers: Johan Subprime Loans Prime Loans (Credit Score 640 and up) Low Risk Financially stable borrowers Likely to pay on time Subprime Loans (Credit Score 639 and down) High Risk Less responsible borrowers Less favorable terms, higher interest rate

Minimum Credit Score Recommendation The Leftovers: Johan Minimum Credit Score Recommendation Minimum Credit Score: 550 Average Days Delinquent 64 days Consider Higher Deposit Acceptable Risk

Federal Reserve Federal Reserve = Central Bank of the United States The Leftovers: Kyle Federal Reserve Federal Reserve = Central Bank of the United States Manipulates: Money Supply

Decreased Supply of Loanable Funds The Leftovers: Kyle Decreased Supply of Loanable Funds Decreased Borrowing and Lending Increased Interest Rate

Home Price Change by Interest Rates The Leftovers: Kyle Home Price Change by Interest Rates

Second First Impacts Moral Hazard Problem Unable to Refinance The Leftovers: Kyle Impacts First Moral Hazard Problem Unable to Refinance Second Default Rate of 3-5% Underwater

Monthly Interest Rate The Leftovers: Anzhelika Average home loan - $200,000 Interest rate on subprime loan – 8 % (6% interest rate for prime loan + 2% premium) Annual interest rate on $200,000: $200,000 x 8% = $16,000 Monthly interest amount: $16,000/12 months = $1,333.33

Average Interest Loss The Leftovers: Anzhelika The average number of months without interest – 7.5 months The average interest loss (per loan that became delinquent): 1,333.33 x 7.5 months ≈ $10,000

Expected Loss The Leftovers: Anzhelika Average probability of default – 4% Average interest loss  $10,000 Premium – 2% ($4,000) Yes

The Leftovers: Anzhelika Example

The Leftovers: Anzhelika Example

Example Explanation The Leftovers: Anzhelika Premium on 96 out of 100 home loans (performing loans): $4,000 x 96 home loans = $384,000 Expected loss from 4 out of 100 home loans (nonperforming loans): $10,000 x 4 home loans= $40,000

Strategic Consideration The Leftovers: Andrew Strategic Consideration Credit Score Below 640 Risk too high Establish Minimum Credit Score 4 out of 100 homes would default Higher risk with assumed market terms Subprime Market, Assumed Terms Deposit of 15% Scores Below 550 are less likely to pay Enter into the Subprime Market

Secondary Primary Stakeholders Home Owners Secondary Market Banks The Leftovers: Miranda Stakeholders Primary Banks Secondary Market Prime Borrowers Subprime Borrowers Secondary Home Owners Real Estate Agents Bank

Ethical Theories Utilitarian Categorical Imperative The Leftovers: Miranda Ethical Theories Utilitarian Greatest good to greatest number Categorical Imperative What if everyone acted this way?

Entering the Subprime Market? The Leftovers: Miranda Entering the Subprime Market? Utilitarian Theory Categorical Imperative Negatively effect stakeholders More harm than benefit Major Effect on Banks Prime Borrowers Secondary Market Unethical Same opportunities for any borrower Value of Credit Score Major Effect on Prime Market Subprime Market Unethical

Enter into Subprime Market The Leftovers: Andrew Recommendation Enter into Subprime Market Higher Deposit Credit Score over 550 Secondary Market

Ethical Analysis: Recommendation The Leftovers: Miranda Ethical Analysis: Recommendation Utilitarian Theory Categorical Imperative Benefits Stakeholders More Benefit than Harm Major Effect on Banks Prime & Secondary Borrowers Secondary Market Ethical Same opportunities for Borrowers Value of Credit Score Kept Major Effect on Prime Market Subprime Market Ethical

Thank You! The Leftovers

References Anonymous. To Loan or Not to Loan. Student Coaching Notes [PowerPoint slides]. Retrieved from https://moodle.csun.edu/course/view.php?id=65384/index.html Anonymous. To Loan or Not to Loan. Data [Excel spreadsheets]. Anonymous. Statistics Review Material. Key Concepts 4, 5, 6, 8 [PowerPoint slides]. Retrieved from http://www.csun.edu/cobaessc/statistics-review-material Anonymous. Macroeconomics Review Material. Key Concepts 4, 6, 7, 9 [Pdf documents]. Retrieved from http://www.csun.edu/cobaessc/macroeconomics-review Anonymous. Ethical Decision Making [PowerPoint slides]. Retrieved from https://moodle.csun.edu/course/view.php?id=65384/index.html Johnson, G., Roberts, W., & Trybus, E. (2009). To Loan or Not to Loan: A Subprime Dilemma [Pdf document]. Retrieved from https://moodle.csun.edu/pluginfile.php/2301725/mod_resource/content/0/To Loan or Not to Loan - Case Text.pdf