GEOG 216 Chapter Notes -Securitization, Negative Equity, Arbitrage

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5 Dec 2012
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The Local Geographies of the Financial Crisis
12/5/12 1:25 AM
1. Introduction
Local geographies have been inextricably linked to and constitutive of global
Local sub-prime mortgage lending ended up as securities traded on global
bond markets ! undermined securities when they collapsed
The recent financial crisis is an example of ‘glocalisation’.
2. Making the Case for a Geographical Perspective
Richard O’Brien
Money is hyper-fungible and hyper mobile
Geography is irrelevant
Countries differ in banking structures, regulatory regimes and
Financial markets are controlled from specific places
Globalization has made monetary-space both multi-scalar and more
Monetary-space is a space of transactions and a space of places.
Delocalized local financial circuits
Localized the global
Monetary-space has become glocalised: the local and the global have
become inextricably interwoven.
3. The New Globalized Model of Local Mortgage Lending
Factors to explain the housing bubble
Falling real mortgage rates
Demographic trends
Income growth
The treatment of housing as an investment and speculative asset
Country-specific factors
US and UK: ‘perpetual money machine’ illusion
Unprecedented process of debt financed wealth creation and
In the US, homeownership is viewed as a key driver of economic growth.
Recent House Price Bubble
Drew in new mortgage lenders
New models for mortgage lending
An end to geographical and product restrictions
o Securitizing loans in the form of mortgage backed securities,
collaterized debt obligation and other exotic financial
New ‘Locally Originate, Globally Distribute’ Model
Local home buyer gets a loan from the bank
The buyer makes monthly payments, but rather than the bank
holding the loan it is parceled with other loans and sold to investors
Used for investors to hold their money
SIVs and SPVs
This new model globalized local mortgages.
This expansion of mortgage lending was extremely profitable for banks. !
subprime loans
Loans with substantial default risk were being bundled into privately backed
‘buy-to-let’: using housing as a speculative asset, personal income or
pension generating device
4. Local Housing and Mortgage Bubbles
Rising house prices and the mortgage lending spree became mutually
reinforcing financial bubbles.
The housing bubble did not equally distribute itself across the US.
Three Types of Cities
1. Cities that were characteristically supply-constrained and which
traditionally have had ‘cyclical markets’
NY, Boston, LA, San Fran
2. Cities of slow economic growth and less constraints on new housing
construction, had ‘steady markets’
Atlanta, Charlotte, Chicago, Denver, Detroit
3. Cities that were ‘recent boomers’; those which ahs previously stable
markets but experienced major waves of speculative house building and
extraordinary increased in house prices
Las Vegas, Miami, Phoenix, Tampa
Highly spatially differentiated and uneven process
5. The Local Geographies of the Sub-Prime Crisis
Major and Unexpected fall in housing prices (2006-08) ! zero or negative
equity in homes ! risks of default or foreclosure
Sub-prime mortgages
Higher repayment default rate than prime mortgages
Adjustable interest rates
Fall of these mortgages led to a fall in the value of mortgage backed
securities in the global market
This triggered the banking crisis ! triggered the global economic downturn
! causing local job losses ! increasing local repayment default rates !
The Higher the proportion of local mortgage lending that was subprime, the
higher has been the local subprime foreclosure rate.
6. The Local Impact of the Crisis-Induced Recession
The banking crisis has significantly reduced the number of workers in the
finance industry.
States and cities that saw the most intense rates of subprime foreclosures
have also been those to experience the highest unemployment rates.
Manufacturing areas have been hit hard by the recession.
Effects may prove to be long-lasting.
7. Geography and Financial Reform
‘backyard regulatory overkill’: financial centres must compete on a level
regulatory playing field, otherwise banks would have opportunities for
‘regulatory arbitrage’
Effects of Curbs and Controls on Major Financial Centers
They would severely reduce the contribution that the financial
sector makes to the national economy
They would lead to an exodus of financial firms and workers to
financial centers in other countries
They would lead to a decline in living standards and lifestyle
aspirations for many because of the curtailing of credit to
households and businesses
Arguments against hosting major financial centers
Centers are sources of inflationary pressures
Parasitic ! divert capital and human resources from other regions
to the center
Can restrict the flow of funds to other regions of the country