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

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

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

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

5. 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 = x
90 = – * Credit Score
Credit Score = 446

6. 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

7. 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

8. 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

9. 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

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

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

12. 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

13. 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

14. 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, x 7.5 months ≈ $10,000

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

16. The Leftovers: Anzhelika
Example

17. The Leftovers: Anzhelika
Example

18. 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

19. 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

20. 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

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

22. 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

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

24. 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

25. Thank You!
The Leftovers

26. References
Anonymous. To Loan or Not to Loan. Student Coaching Notes [PowerPoint slides].
Retrieved from
Anonymous. To Loan or Not to Loan. Data [Excel spreadsheets].
Anonymous. Statistics Review Material. Key Concepts 4, 5, 6, 8 [PowerPoint slides]. Retrieved from
Anonymous. Macroeconomics Review Material. Key Concepts 4, 6, 7, 9 [Pdf documents]. Retrieved from
Anonymous. Ethical Decision Making [PowerPoint slides]. Retrieved from
Johnson, G., Roberts, W., & Trybus, E. (2009). To Loan or Not to Loan: A Subprime Dilemma [Pdf document]. Retrieved from Loan or Not to Loan - Case Text.pdf