U.S. subprime crisis 5: implications

Francis Fukuyama has argued that the crisis represents the end of Reaganism in the financial sector, which was characterized by lighter regulation, pared-back government, and lower taxes. Significant financial sector regulatory changes are expected as a result of the crisis.

Fareed Zakaria believes that the crisis may force Americans and their government to live within their means. Further, some of the best minds may be redeployed from financial engineering to more valuable business activities, or to science and technology.

Roger Altman wrote that "the crash of 2008 has inflicted profound damage on [the U.S.] financial system, its economy, and its standing in the world; the crisis is an important geopolitical setback...the crisis has coincided with historical forces that were already shifting the world's focus away from the United States. Over the medium term, the United States will have to operate from a smaller global platform – while others, especially China, will have a chance to rise faster."

GE CEO Jeffrey Immelt has argued that U.S. trade deficits and budget deficits are unsustainable. America must regain its competitiveness through innovative products, training of production workers, and business leadership. He advocates specific national goals related to energy security or independence, specific technologies, expansion of the manufacturing job base, and net exporter status. "The world has been reset. Now we must lead an aggressive American renewal to win in the future." Of critical importance, he said, is the need to focus on technology and manufacturing. "Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy – and somehow still expect to prosper," Jeff said. "That idea was flat wrong."

Economist Paul Krugman wrote in 2009: "The prosperity of a few years ago, such as it was – profits were terrific, wages not so much – depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either." Niall Ferguson stated that excluding the effect of home equity extraction, the U.S. economy grew at a 1% rate during the Bush years. Microsoft CEO Steve Ballmer has argued that this is an economic reset at a lower level, rather than a recession, meaning that no quick recovery to pre-recession levels can be expected.

The U.S. Federal government's efforts to support the global financial system have resulted in significant new financial commitments, totaling $7 trillion by November, 2008. These commitments can be characterized as investments, loans, and loan guarantees, rather than direct expenditures. In many cases, the government purchased financial assets such as commercial paper, mortgage-backed securities, or other types of asset-backed paper, to enhance liquidity in frozen markets. As the crisis has progressed, the Fed has expanded the collateral against which it is willing to lend to include higher-risk assets.

The Economist wrote in May 2009: "Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors. Given the political implications of such austerity, the temptation will be to default by stealth, by letting their currencies depreciate. Investors are increasingly alive to this danger..."

The crisis has cast doubt on the legacy of Alan Greenspan, the Chairman of the Federal Reserve System from 1986 to January 2006. Senator Chris Dodd claimed that Greenspan created the "perfect storm". When asked to comment on the crisis, Greenspan spoke as follows:

The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.

Sources:

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Implications

U.S. subprime crisis 4: responses

Various actions have been taken since the crisis became apparent in August 2007. In September 2008, major instability in world financial markets increased awareness and attention to the crisis. Various agencies and regulators, as well as political officials, began to take additional, more comprehensive steps to handle the crisis.

Regulatory proposals
President Barack Obama and key advisers introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others. The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010 to address some of the causes of the crisis.

Federal Reserve and central banks
The central bank of the USA, the Federal Reserve, in partnership with central banks around the world, has taken several steps to address the crisis. Federal Reserve Chairman Ben Bernanke stated in early 2008: "Broadly, the Federal Reserve's response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy." The Fed has:

• Lowered the target for the Federal funds rate from 5.25% to 2%, and the discount rate from 5.75% to 2.25%. This took place in six steps occurring between 18 September 2007 and 30 April 2008; In December 2008, the Fed further lowered the federal funds rate target to a range of 0–0.25% (25 basis points).
• Undertaken, along with other central banks, open market operations to ensure member banks remain liquid. These are effectively short-term loans to member banks collateralized by government securities. Central banks have also lowered the interest rates (called the discount rate in the USA) they charge member banks for short-term loans;
• Created a variety of lending facilities to enable the Fed to lend directly to banks and non-bank institutions, against specific types of collateral of varying credit quality. These include the Term Auction Facility (TAF) and Term Asset-Backed Securities Loan Facility (TALF).
• In November 2008, the Fed announced a $600 billion program to purchase the MBS of the GSE, to help lower mortgage rates.
• In March 2009, the Federal Open Market Committee decided to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of government-sponsored enterprise mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities during 2009.

According to Ben Bernanke, expansion of the Fed balance sheet means the Fed is electronically creating money, necessary "...because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."

The New York Times reported in February 2013 that the Fed continued to support the economy with various monetary stimulus measures: "The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities to promote more borrowing and lending, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below 6.5 percent."

Economic stimulus
On 13 February 2008, President George W. Bush signed into law a $168 billion economic stimulus package, mainly taking the form of income tax rebate checks mailed directly to taxpayers. Checks were mailed starting the week of 28 April 2008. However, this rebate coincided with an unexpected jump in gasoline and food prices. This coincidence led some to wonder whether the stimulus package would have the intended effect, or whether consumers would simply spend their rebates to cover higher food and fuel prices.

On 17 February 2009, U.S. President Barack Obama signed the American Recovery and Reinvestment Act of 2009, an $787 billion stimulus package with a broad spectrum of spending and tax cuts. Over $75 billion of which was specifically allocated to programs which help struggling homeowners. This program is referred to as the Homeowner Affordability and Stability Plan.

The U.S. government continued to run large deficits post-crisis, with the national debt rising from $10.0 trillion as of September 2008 to $16.1 trillion by September 2012. The debt increases were $1.89 trillion in fiscal year 2009, $1.65 trillion in 2010, $1.23 trillion in 2011, and $1.26 trillion in 2012.

Bank solvency and capital replenishment
Losses on mortgage-backed securities and other assets purchased with borrowed money have dramatically reduced the capital base of financial institutions, rendering many either insolvent or less capable of lending. Governments have provided funds to banks. Some banks have taken significant steps to acquire additional capital from private sources.

The U.S. government passed the Emergency Economic Stabilization Act of 2008 (EESA or TARP) during October 2008. This law included $700 billion in funding for the "Troubled Assets Relief Program" (TARP), which was used to lend funds to banks in exchange for dividend-paying preferred stock.

Another method of recapitalizing banks is for government and private investors to provide cash in exchange for mortgage-related assets (i.e., "toxic" or "legacy" assets), improving the quality of bank capital while reducing uncertainty regarding the financial position of banks. U.S. Treasury Secretary Timothy Geithner announced a plan during March 2009 to purchase "legacy" or "toxic" assets from banks. The Public-Private Partnership Investment Program involves government loans and guarantees to encourage private investors to provide funds to purchase toxic assets from banks.

As of April 2012, the government had recovered $300 billion of the $414 billion that was ultimately distributed to them via TARP. Some elements of TARP such as foreclosure prevention aid will not be paid back. Estimated taxpayer losses were $60 billion.

Bailouts and failures of financial firms
Several major financial institutions either failed, were bailed-out by governments, or merged (voluntarily or otherwise) during the crisis. While the specific circumstances varied, in general the decline in the value of mortgage-backed securities held by these companies resulted in either their insolvency, the equivalent of bank runs as investors pulled funds from them, or inability to secure new funding in the credit markets. These firms had typically borrowed and invested large sums of money relative to their cash or equity capital, meaning they were highly leveraged and vulnerable to unanticipated credit market disruptions.

The five largest U.S. investment banks, with combined liabilities or debts of $4 trillion, either went bankrupt (Lehman Brothers), were taken over by other companies (Bear Stearns and Merrill Lynch), or were bailed-out by the U.S. government (Goldman Sachs and Morgan Stanley) during 2008. Government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac either directly owed or guaranteed nearly $5 trillion in mortgage obligations, with a similarly weak capital base, when they were placed into receivership in September 2008. For scale, this $9 trillion in obligations concentrated in seven highly leveraged institutions can be compared to the $14 trillion size of the U.S. economy (GDP) or to the total national debt of $10 trillion in September 2008.

Major depository banks around the world had also used financial innovations such as structured investment vehicles to circumvent capital ratio regulations. Notable global failures included Northern Rock, which was nationalized at an estimated cost of £87 billion ($150 billion). In the U.S., Washington Mutual (WaMu) was seized in September 2008 by the USA Office of Thrift Supervision (OTS). This would be followed by the shotgun wedding of Wells Fargo & Wachovia after it was speculated that without the merger Wachovia was also going to fail. Dozens of U.S. banks received funds as part of the TARP or $700 billion bailout. The TARP funds gained some controversy after PNC Financial Services received TARP money, only to turn around hours later and purchase the struggling National City Corp., which itself had become a victim of the subprime crisis.

As a result of the financial crisis in 2008, twenty-five U.S. banks became insolvent and were taken over by the FDIC. As of August 14, 2009, an additional 77 banks became insolvent. This seven-month tally surpasses the 50 banks that were seized in all of 1993, but is still much smaller than the number of failed banking institutions in 1992, 1991, and 1990. The United States has lost over 6 million jobs since the recession began in December 2007.

The FDIC deposit insurance fund, supported by fees on insured banks, fell to $13 billion in the first quarter of 2009. That is the lowest total since September, 1993.

According to some, the bailouts could be traced directly to Alan Greenspan's efforts to reflate the stock market and the economy after the tech stock bust, and specifically to a February 23, 2004 speech Mr. Greenspan made to the Mortgage Bankers Association where he suggested that the time had come to push average American borrowers into more exotic loans with variable rates, or deferred interest. This argument suggests that Mr. Greenspan sought to enlist banks to expand lending and debt to stimulate asset prices and that the Federal Reserve and US Treasury Department would back any losses that might result. As early as March 2007 some commentators predicted that a bailout of the banks would exceed $1 trillion, at a time when Ben Bernanke, Alan Greenspan and Henry Paulson all claimed that mortgage problems were "contained" to the subprime market and no bailout of the financial sector would be necessary.

Homeowner assistance
Both lenders and borrowers may benefit from avoiding foreclosure, which is a costly and lengthy process. Some lenders have offered troubled borrowers more favorable mortgage terms (i.e., refinancing, loan modification or loss mitigation). Borrowers have also been encouraged to contact their lenders to discuss alternatives.

The Economist described the issue this way in February 2009: "No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programmes have been ineffectual, and private efforts not much better." Up to 9 million homes may enter foreclosure over the 2009–2011 period, versus one million in a typical year. At roughly U.S. $50,000 per foreclosure according to a 2006 study by the Chicago Federal Reserve Bank, 9 million foreclosures represents $450 billion in losses.

A variety of voluntary private and government-administered or supported programs were implemented during 2007–2009 to assist homeowners with case-by-case mortgage assistance, to mitigate the foreclosure crisis engulfing the U.S. One example is the Hope Now Alliance, an ongoing collaborative effort between the US Government and private industry to help certain subprime borrowers. In February 2008, the Alliance reported that during the second half of 2007, it had helped 545,000 subprime borrowers with shaky credit, or 7.7% of 7.1 million subprime loans outstanding as of September 2007. A spokesperson for the Alliance acknowledged that much more must be done.

During late 2008, major banks and both Fannie Mae and Freddie Mac established moratoriums (delays) on foreclosures, to give homeowners time to work towards refinancing.

Critics have argued that the case-by-case loan modification method is ineffective, with too few homeowners assisted relative to the number of foreclosures and with nearly 40% of those assisted homeowners again becoming delinquent within 8 months. In December 2008, the U.S. FDIC reported that more than half of mortgages modified during the first half of 2008 were delinquent again, in many cases because payments were not reduced or mortgage debt was not forgiven. This is further evidence that case-by-case loan modification is not effective as a policy tool.

In February 2009, economists Nouriel Roubini and Mark Zandi recommended an "across the board" (systemic) reduction of mortgage principal balances by as much as 20–30%. Lowering the mortgage balance would help lower monthly payments and also address an estimated 20 million homeowners that may have a financial incentive to enter voluntary foreclosure because they are "underwater" (i.e., the mortgage balance is larger than the home value).

A study by the Federal Reserve Bank of Boston indicated that banks were reluctant to modify loans. Only 3% of seriously delinquent homeowners had their mortgage payments reduced during 2008. In addition, investors who hold MBS and have a say in mortgage modifications have not been a significant impediment; the study found no difference in the rate of assistance whether the loans were controlled by the bank or by investors. Commenting on the study, economists Dean Baker and Paul Willen both advocated providing funds directly to homeowners instead of banks.

The L.A. Times reported the results of a study that found homeowners with high credit scores at the time of entering the mortgage are 50% more likely to "strategically default" – abruptly and intentionally pull the plug and abandon the mortgage – compared with lower-scoring borrowers. Such strategic defaults were heavily concentrated in markets with the highest price declines. An estimated 588,000 strategic defaults occurred nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in the fourth quarter of 2008.

Homeowners Affordability and Stability Plan
On 18 February 2009, U.S. President Barack Obama announced a $73 billion program to help up to nine million homeowners avoid foreclosure, which was supplemented by $200 billion in additional funding for Fannie Mae and Freddie Mac to purchase and more easily refinance mortgages. The plan is funded mostly from the EESA's $700 billion financial bailout fund. It uses cost sharing and incentives to encourage lenders to reduce homeowner's monthly payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrower’s income, with government sharing the cost to further cut the rate to 31 percent. The plan also involves forgiving a portion of the borrower’s mortgage balance. Companies that service mortgages will get incentives to modify loans and to help the homeowner stay current.

Sources:

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Responses

U.S. subprime crisis 3: impacts

Impact in the U.S.
Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion. Taken together, these losses total $8.3 trillion.

• Real gross domestic product (GDP) began contracting in the third quarter of 2008 and did not return to growth until Q1 2010. CBO estimated in February 2013 that real U.S. GDP remained 5.5% below its potential level, or about $850 billion. CBO projected that GDP would not return to its potential level until 2017.
• The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009, then steadily declined to 7.6% by March 2013. The number of unemployed rose from approximately 7 million in 2008 pre-crisis to 15 million by 2009, then declined to 12 million by early 2013.
• Residential private investment (mainly housing) fell from its 2006 pre-crisis peak of $800 billion, to $400 billion by mid-2009 and has remained depressed at that level. Non-residential investment (mainly business purchases of capital equipment) peaked at $1,700 billion in 2008 pre-crisis and fell to $1,300 billion in 2010, but by early 2013 had nearly recovered to this peak.
• Housing prices fell approximately 30% on average from their mid-2006 peak to mid-2009 and remained at approximately that level as of March 2013.
• Stock market prices, as measured by the S&P 500 index, fell 57% from their October 2007 peak of 1,565 to a trough of 676 in March 2009. Stock prices began a steady climb thereafter and returned to record levels by April 2013.
• The net worth of U.S. households and non-profit organizations fell from from a peak of approximately $67 trillion in 2007 to a trough of $52 trillion in 2009, a decline of $15 trillion or 22%. It began to recover thereafter and was $66 trillion by Q3 2012.
• U.S. total national debt rose from 66% GDP in 2008 pre-crisis to over 103% by the end of 2012. Martin Wolf and Paul Krugman argued that the rise in private savings and decline in investment fueled a large private sector surplus, which drove sizable budget deficits.

Members of USA minority groups received a disproportionate number of subprime mortgages, and so have experienced a disproportionate level of the resulting foreclosures. Recent research shows that complex mortgages were chosen by prime borrowers with high income levels seeking to purchase expensive houses relative to their incomes. Borrowers with complex mortgages experienced substantially higher default rates than borrowers with traditional mortgages with similar characteristics. The crisis had a devastating effect on the U.S. auto industry. New vehicle sales, which peaked at 17 million in 2005, recovered to only 12 million by 2010.

Impact on Europe
The crisis in Europe generally progressed from banking system crises to sovereign debt crises, as many countries elected to bailout their banking systems using taxpayer money. Greece was different in that it concealed large public debts in addition to issues within its banking system. Several countries received bailout packages from the "troika" (European Commission, European Central Bank, International Monetary Fund), which also implemented a series of emergency measures.

Many European countries embarked on austerity programs, reducing their budget deficits relative to GDP from 2010 to 2011. For example, according to the CIA World Factbook Greece improved its budget deficit from 10.4% GDP in 2010 to 9.6% in 2011. Iceland, Italy, Ireland, Portugal, France, and Spain also improved their budget deficits from 2010 to 2011 relative to GDP.

However, with the exception of Germany, each of these countries had public-debt-to-GDP ratios that increased (i.e., worsened) from 2010 to 2011, as indicated in the chart at right. Greece's public-debt-to-GDP ratio increased from 143% in 2010 to 165% in 2011. This indicates that despite improving budget deficits, GDP growth was not sufficient to support a decline (improvement) in the debt-to-GDP ratio for these countries during this period. Eurostat reported that the debt to GDP ratio for the 17 Euro area countries together was 70.1% in 2008, 79.9% in 2009, 85.3% in 2010, and 87.2% in 2011.

Unemployment is another variable that might be considered in evaluating austerity measures. According to the CIA World Factbook, from 2010 to 2011, the unemployment rates in Spain, Greece, Ireland, Portugal, and the UK increased. France and Italy had no significant changes, while in Germany and Iceland the unemployment rate declined. Eurostat reported that Eurozone unemployment reached record levels in September 2012 at 11.6%, up from 10.3% the prior year. Unemployment varied significantly by country.

Economist Martin Wolf analyzed the relationship between cumulative GDP growth from 2008-2012 and total reduction in budget deficits due to austerity policies (see chart at right) in several European countries during April 2012. He concluded that: "In all, there is no evidence here that large fiscal contractions [budget deficit reductions] bring benefits to confidence and growth that offset the direct effects of the contractions. They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions." Changes in budget balances (deficits or surpluses) explained approximately 53% of the change in GDP, according to the equation derived from the IMF data used in his analysis.

Economist Paul Krugman analyzed the relationship between GDP and reduction in budget deficits for several European countries in April 2012 and concluded that austerity was slowing growth, similar to Martin Wolf. He also wrote: "... this also implies that 1 euro of austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster."

Financial market impacts, 2007
The crisis began to affect the financial sector in February 2007, when HSBC, the world's largest (2008) bank, wrote down its holdings of subprime-related MBS by $10.5 billion, the first major subprime related loss to be reported. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. Top management has not escaped unscathed, as the CEOs of Merrill Lynch and Citigroup resigned within a week of each other in late 2007. As the crisis deepened, more and more financial firms either merged, or announced that they were negotiating seeking merger partners.

During 2007, the crisis caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into commodities as "stores of value". Financial speculation in commodity futures following the collapse of the financial derivatives markets has contributed to the world food price crisis and oil price increases due to a "commodities super-cycle." Financial speculators seeking quick returns have removed trillions of dollars from equities and mortgage bonds, some of which has been invested into food and raw materials.

Mortgage defaults and provisions for future defaults caused profits at the 8533 USA depository institutions insured by the Federal Deposit Insurance Corporation to decline from $35.2 billion in 2006 Q4 to $646 million in the same quarter a year later, a decline of 98%. 2007 Q4 saw the worst bank and thrift quarterly performance since 1990. In all of 2007, insured depository institutions earned approximately $100 billion, down 31% from a record profit of $145 billion in 2006. Profits declined from $35.6 billion in 2007 Q1 to $19.3 billion in 2008 Q1, a decline of 46%.

Financial market impacts, 2008
As of August 2008, financial firms around the globe have written down their holdings of subprime related securities by US$501 billion. The IMF estimates that financial institutions around the globe will eventually have to write off $1.5 trillion of their holdings of subprime MBSs. About $750 billion in such losses had been recognized as of November 2008. These losses have wiped out much of the capital of the world banking system. Banks headquartered in nations that have signed the Basel Accords must have so many cents of capital for every dollar of credit extended to consumers and businesses. Thus the massive reduction in bank capital just described has reduced the credit available to businesses and households.

When Lehman Brothers and other important financial institutions failed in September 2008, the crisis hit a key point. During a two-day period in September 2008, $150 billion were withdrawn from USA money funds. The average two-day outflow had been $5 billion. In effect, the money market was subject to a bank run. The money market had been a key source of credit for banks (CDs) and nonfinancial firms (commercial paper). The TED spread, a measure of the risk of interbank lending, quadrupled shortly after the Lehman failure. This credit freeze brought the global financial system to the brink of collapse. In a nine-day period from Oct. 1-9, the S&P 500 fell a staggering 251 points, losing 21.6% of its value. The week of Oct. 6-10 saw the largest percentage drop in the history of the Dow Jones Industrial Average - even worse than any single week in the Great Depression.

The response of the USA Federal Reserve, the European Central Bank, and other central banks was immediate and dramatic. During the last quarter of 2008, these central banks purchased US$2.5 trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks. On Dec. 16, 2008, the Federal Reserve cut the Federal funds rate to 0-0.25%, where it has remained since then; this period of zero interest-rate policy is unprecedented in U.S. history.

However, some economists state that Third-World economies, such as the Brazilian and Chinese ones, will not suffer as much as those from more developed countries. However, other analysts have seen Brazil as entering their own sub-prime crisis.

The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses are expected to top $2.8 trillion from 2007–10. U.S. banks losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S. banks were about 60 percent through their losses, but British and eurozone banks only 40 percent.

Sustained effects
In Spring 2011 there were about a million homes in foreclosure in the United States, several million more in the pipeline, and 872,000 previously foreclosed homes in the hands of banks. Sales were slow; economists estimated that it would take three years to clear the backlogged inventory. According to Mark Zandi of Moody’s Analytics, home prices were falling and could be expected to fall further during 2011. However, the rate of new borrowers falling behind in mortgage payments had begun to decrease.

The crisis had a significant and long-lasting impact on U.S. employment. During the Great Recession, 8.5 million jobs were lost from the peak employment in early 2008 of approximately 138 million to the trough in February 2010 of 129 million, roughly 6% of the workforce. From February 2010 to September 2012, approximately 4.3 million jobs were added, offsetting roughly half the losses.

Research indicates recovery from financial crisis can be protracted, with lengthy periods of high unemployment and substandard economic growth. Economist Carmen Reinhart stated in August 2011: "Debt de-leveraging [reduction] takes about seven years...And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before."

Sources:

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Impacts

U.S. subprime crisis 2: causes

The crisis can be attributed to a number of factors pervasive in both housing and credit markets, factors which emerged over a number of years. Causes proposed include the inability of homeowners to make their mortgage payments (due primarily to adjustable-rate mortgages resetting, borrowers overextending, predatory lending, and speculation), overbuilding during the boom period, risky mortgage products, increased power of mortgage originators, high personal and corporate debt levels, financial products that distributed and perhaps concealed the risk of mortgage default, bad monetary and housing policies, international trade imbalances, and inappropriate government regulation.  Excessive consumer housing debt was in turn caused by the mortgage-backed security, credit default swap, and collateralized debt obligation sub-sectors of the financial industry, which were offering irrationally low interest rates and irrationally high levels of approval to subprime mortgage consumers because they were calculating aggregate risk using Gaussian copula formulas that strictly assumed the independence of individual component mortgages, when in fact the credit-worthiness almost every new subprime mortgage was highly correlated with that of any other because of linkages through consumer spending levels which fell sharply when property values began to fall during the initial wave of mortgage defaults. Debt consumers were acting in their rational self-interest, because they were unable to audit the finance industry's opaque faulty risk pricing methodology.

Among the important catalysts of the subprime crisis were the influx of money from the private sector, the banks entering into the mortgage bond market, government policies aimed at expanding home ownership, speculation by many home buyers, and the predatory lending practices of the the mortgage lenders, specifically the adjustable-rate mortgage, 2-28 loan, that mortgage lenders sold directly or indirectly via mortgage brokers. On Wall Street and in the financial industry, moral hazard lay at the core of many of the causes.

In its "Declaration of the Summit on Financial Markets and the World Economy," dated 15 November 2008, leaders of the Group of 20 cited the following causes:

During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

Federal Reserve chair Ben Bernanke testified in September 2010 regarding the causes of the crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off the crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and supervision) that amplified the shocks. Examples of triggers included: loses on subprime mortgage securities that began in 2007 and a run on the shadow banking system that began in mid-2007, which adversely affected the functioning of money markets. Examples of vulnerabilities in the private sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as a tool for taking excessive risks. Examples of vulnerabilities in the public sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed "Too big to fail" institutions, monetary policy, and trade deficits.

During May 2010, Warren Buffett and Paul Volcker separately described questionable assumptions or judgments underlying the U.S. financial and economic system that contributed to the crisis. These assumptions included: 1) Housing prices would not fall dramatically; 2) Free and open financial markets supported by sophisticated financial engineering would most effectively support market efficiency and stability, directing funds to the most profitable and productive uses; 3) Concepts embedded in mathematics and physics could be directly adapted to markets, in the form of various financial models used to evaluate credit risk; 4) Economic imbalances, such as large trade deficits and low savings rates indicative of over-consumption, were sustainable; and 5) Stronger regulation of the shadow banking system and derivatives markets was not needed.

The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels."

Sources:

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Causes

U.S. subprime crisis 1: overview and background

The United States subprime mortgage crisis was a set of events and conditions that led to a financial crisis and subsequent recession that began in 2008. It was characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. These mortgage-backed securities (MBS) and collateralized debt obligations (CDO) initially offered attractive rates of return due to the higher interest rates on the mortgages; however, the lower credit quality ultimately caused massive defaults. Several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.

There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others. A proximate cause was the rise in subprime lending. The percentage of lower-quality subprime mortgages originated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts o the U.S. A high percentage of these subprime mortgages, over 90% in 006, for example were adjustable-rate mortgages (ARM). These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products. Further, U.S. households had become increasingly indebted, with the ratio of debt to disposable personal income rising from 77% in 1990 to 127% at the end of 2007, much of this increase mortgage-related.

When U.S. home prices declined steeply after peaking in mid-2006, it became more difficult for borrowers to refinance their loans. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U.S. and Europe.

The crisis had severe, long-lasting consequences for the U.S. and European economies. The U.S. entered a deep recession, with nearly 9 million jobs lost during 2008 and 2009, roughly 6% of the workforce. U.S. housing prices fell nearly 30% on average and the U.S. stock market fell approximately 50% by early 2009. As early 013, the U.S. stock market had recovered to its pre-crisis peak but housing prices remained near their low point and unemployment remained elevated. Economic growth remained below pre-crisis levels. Europe also continued to struggle with its own economic crisis, elevated unemployment and severe banking impairments (estimated at €940 billion between 2008 and 2012).

Background and timeline of events
The immediate cause or trigger of the crisis was the bursting of the United States housing bubble with peaked in approximately 2005-2006. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume risky mortgages in the anticipation that they would be able to quickly refinance at easier terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006-2007 in many parts of the U.S., borrowers were unable to refinance. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices fell, and ARM interest rates reset higher. Falling prices also resulted in 23% of U.S. homes worth less than the mortgage loan by September 2010, providing a financial incentive for borrowers to enter foreclosure. The ongoing foreclosure epidemic, of which subprime loans are one part, that began in late 006 in the U.S. continues to be key factor in the global economic crisis, because it drains wealth from consumers and erodes the financial strength of banking institutions.

Several other factors set the stage for the rise and fall of housing prices related securities widely held by financial firms. In the years leading up to the crisis, the U.S. received large amounts of foreign money from fast-growing economies in Asia and oil-producing/exporting countries. This inflow of funds combined with low U.S. interest rates from 2002-2004 contributed to easy credit conditions, which fueled both housing and credit bubbles. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.

As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in MBS reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses were estimated in the trillions of U.S. dollars globally.

While the housing and credit bubbles were growing, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Shadow banks were able to mask the extent of their risk taking from investors and regulators through the use of complex, off-balance sheet derivatives and securitizations.

These instruments also made it virtually impossible to reorganize financial institutions in bankruptcy, and contributed to the need for government bailouts. Some experts believe these shadow institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations. These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses.

These losses impacted the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions, assuming significant additional financial commitments.

The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. Effects on global stock markets due to the crisis have been dramatic. Between 1 January and 11 October 2008, owners of stocks in U.S. corporations had suffered about $8 trillion in losses, as their holding declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40%.

Losses in the stock market and housing value declines place further downward pressure on consumer spending, a key economic engine. Leaders of the larger developed and emerging nations met in November 2008 and March 2009 to formulate strategies for addressing the crisis. A variety of solutions have been proposed by government officials, central bankers, economists, and business executives.  In the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010 to address some of the causes of the crisis.

Mortgage market
Subprime borrowers typically have weakened credit histories and reduced repayment capacity. Subprime loans have a higher risk of default than loans to prime borrowers. If a borrower is delinquent in making timely mortgage payments to the loan servicer (a bank or other financial firm), the lender may take possession of the property, in a process called foreclosure.

The value of American subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding. Between 2004 and 2006, the share of subprime mortgages relative to total originations ranged from 18%-21%, versus less than 10% in 2001-2003 and during 2007. The boom in mortgage lending, including subprime lending, was also driven by a fast expansion of non-bank independent mortgage originators which despite their smaller share (around 25 percent in 2002) in the market have contributed to around 20 percent of the increase in mortgage credit between 2003 and 2005. In the third quarter of 2007, subprime ARMs making up only 6.8% of USA mortgages outstanding also accounted for 43% of the foreclosures which began during that quarter.

By October 2007, approximately 16% of subprime ARMs were either 90-days delinquent or the lender had begun foreclosure proceedings, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21% and by May 2008 it was 25%.

According to RealtyTrac, the value of all outstanding residential mortgages, owed by U.S. households to purchase residences housing at most four families, was US$9.9 trillion as of year-end 2006, and US$10.6 trillion as of midyear 2008. During 2007, lenders had begun foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007, and again to 2.8 million in 2009, a 21% increase vs. 2008.

By August 2008, 9.2% of all U.S. mortgages outstanding were either delinquent or in foreclosure. By September 2009, this had risen to 14.4%. Between August 2007 and October 2008, 936,439 USA residences completed foreclosure. Foreclosures are concentrated in particular states both in terms of the number and rate of foreclosure filings. Ten states accounted for 74% of the foreclosure filings during 2008; the top two (California and Florida) represented 41%. Nine states were above the national foreclosure rate average of 1.84% of households.

From September 2008 to September 2012, there were approximately 4 million completed foreclosures in the U.S.  AS of September 2012, approximately 1.4 million homes, or 3.3% of all homes with a mortgage, were in some stage of foreclosure compared with 1.5 million or 3.5%, in September 2011. During September 2012, 57,000 homes completed foreclosure; this is down from 83,000 prior September but well above the 2000-2006 average of 21,000 completed foreclosures per month.

Sources:

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

U.S. housing bubble

The United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states.  Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012. The credit crises resulting from the bursting of the bubble is – according to general consensus – the primary cause of the 2007-2009 recession in the United States.

Increased foreclosure rates in 2006-2007 among U.S. homeowners led to a crisis in August 2008 for the subprime, Alt-A, collaterized debt obligation (CDO), mortgage, credit, hedge fund, and foreign bank markets. In October 2007, the U.S. Secretary of the Treasury called the bursting housing bubble “the most significant risk to our economy.”

Any collapse of the U.S. housing bubble has a direct impact not only on home valuations, but the nation’s mortgage markets, home builders, real estate, home supply retail outlets, Wall Street hedge funds held by large institutional investors, and foreign banks, increasing the risk of a nationwide recession. Concerns about the impact of the collapsing housing and credit markets on the larger U.S. economy caused President George W. Bush and the Chairman of the Federal Reserve Ben Bernanke to announce a limited bailout of the U.S. housing market for homeowners who were unable to pay their mortgage debts.

In 2008 alone, the United States government allocated over $900 billion to special loans and rescues related to the U.S. housing bubble, with over half going to Fannie Mae and Freddie Mac (both of which ware government-sponsored enterprises) as well as the Federal Housing Administration (which is a United States Government agency). On December 24, 2009, the Treasury Department made an unprecedented announcement that it would be providing Fannie Mae and Freddie Mac unlimited financial support for the next three years despite acknowledging losses in excess of $400 billion so far.

Background
Housing bubbles may occur in local or global real estate markets. In their late stages, they are typically characterized by rapid increases in the valuations of real property until unsustainable levels are reached relative to incomes, price-to-rent ratios, and other economic indicators of affordability. This may be followed by decreases in home prices that result in many owners finding themselves in a position of negative equity – a mortgage debt higher than the value of the property. The underlying causes of the housing bubble are complex. Factors include tax policy (exemption of housing from capital gains), historically low interest rates, lax lending standards, failure of regulators to intervene, and speculative fever.

While bubbles may be identifiable in progress, bubbles can be indefinitely measured only in hindsight after a market correction, which in the U.S. housing market began in 2005-2006. Former U.S. Federal Reserve Board Chairman Alan Greenspan said “We had a bubble in housing”, and also said in the wake of the subprime mortgage and credit crises in 2007, “I really didn’t get it until very late in 2005 and 2006.”

The mortgage and credit crises was caused by the inability of a large number of home owners to pay their mortgages as their low introductory-rate mortgages reverted to regular interest rates. Freddie Mac CEO Richard Syron concluded, “We had a bubble”, and concurred with Yale economist Robert Shiller’s warning that home prices appear overvalued and that the correction could last years, with trillions of dollars of home value being lost.

Problems for home owners with good credit surfaced in mid-2007, causing the U.S.’s largest mortgage lender, Countrywide Financial, to warn that a recovery in the housing sector was not expected to occur at least until 2009 because home prices were falling “almost like never before, with the exception of the Great Depression.” The impact of booming home valuations on the U.S. economy since the 2001-2002 recession was an important factor in the recovery, because a large component of consumer spending was fueled by the related refinancing boom, which allowed people to both reduce their monthly mortgage payments with lower interest rates and withdraw equity from their homes as their value increased.

Identification
The burst of the housing bubble was predicted by a handful of political and economic analysts, such as G. Edward Griffinin in his 1994 book, “The Creature from Jekyll Island,” and Jeffery Robert Hunn in a March 3, 2003, editorial. Hunn wrote:

“[W]e can profit from the collapse of the credit bubble and subsequent stock market divestment [(decline)]. However, real estate has not yet joined in a decline of prices fed by selling (and foreclosing). Unless you have a very specific reason to believe that real estate will outperform all other investments for several years, you may deem this prime time to liquidate investment property (for use in more lucrative markets).”

Many contested any suggestion that there could be a housing bubble, particularly at its pea from 2004 to 2006, with some rejecting the “house bubble” label in 2008. Claims that there was no warning of the crisis were further repudiated in an August 2008 article in the New York Times, which reported that in mid-2004 Richard Syron, the CEO of Freddie Ma, received a memo from David Andrukonis, the company’s former chief risk officer, warning that Freddie Mac was financing risk-laden loans that threatened Freddie Mac’s financial stability. In his memo, Mr. Andrukonis wrote that these loans “would likely pose an enormous financial and reputational risk to the company and the country.” The article revealed that more than two dozen high-ranking executives said that Mr. Syron had simply decided to ignore the warnings.

Other cautions came as early as 2001, when the late Federal Reserve governor Edward Gramlich warned of the risks posed by subprime mortgages. In September 2003, at a hearing of the House Financial Services Committee, Congressman Ron Paul identified the housing bubble and foretold the difficulties it would cause: “Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, the homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss.” Reuters reported in October 2007 that a Merrill Lynch analyst too had warned in 2006 that companies could suffer from their subprime investments.

The Economist magazine stated, “The worldwide rise in house prices is the biggest bubble in history,” so any explanation needs to consider its global causes as well as those specific to the United States. The then Federal Reserve Board Chairman Alan Greenspan said in mid-2005 that “at a minimum, there’s a little ‘froth’ (in the U.S. housing market) … it’s hard not to see that there are a lot of local bubbles”. Greenspan admitted in 2007 that froth “was a euphemism for a bubble.

Throughout the bubble period there was little if any mention of the fact that housing in many areas was (and still is) selling for well above replacement cost.

On the basis of 2006 market data that were indicating a marked decline, including lower sales, rising inventories, falling median prices and increased foreclosure rates, some economists have concluded that the correction in the U.S. housing market began in 2006. A May 2006 Fortune magazine report on the U.S. housing bubble states: “The great housing bubble has finally started to deflate … In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials.”

The chief economist of Freddie Mac and the director of Joint Center for Housing Studies (JCHS) denied the existence of a national housing bubble and expressed doubt that any significant decline in home prices was possible, citing consistently rising prices since the Great Depression, an anticipated increased demand from the Baby Boom generation, and healthy levels of employment. However, some have suggested that the funding received from JCHS from the real estate industry may have affected their judgment. David Lereah, former chief economist of the National Association of Realtors (NAR), distributed “Anti-Bubble Reports” in August 2005 to “respond to the irresponsible bubble accusations made by your local media and local academics.”

Among other stages, the reports stated that people “should [not] be concerned that home prices are rising faster than family income”, that “there is virtually no risk of a national housing price bubble based on the fundamental demand for housing and predictable economic factors”, and that “a general slowing in the rate of price growth can be expected but in many areas inventory shortages will persist and home prices are likely to continue to rise above historic norms.” Following reports of rapid sales declines and price depreciation in August 2006, Lereah admitted that the expected “home prices to come down 5% nationally, more in some markets, less in others. And a few cities in Florida and California, where home prices soared to nose-bleed heights, could have ‘hard landings’.”

John A. Kilpatrick, of Greenfield Advisors, was cited by Bloomberg News on June 14, 2007, on the linkage between increased foreclosures and localized housing price declines: “Living in an area with multiple foreclosures can result in a 10 per cent to 20 per cent decrease in property values.” He went to say, “In some cases that can wipe out the equity of homeowners or leave them owing more on their mortgage than the house is worth. The innocent houses that just happen to be sitting next to those properties are going to take a hit.”

The U.S. Senate Banking Committee held hearings on the housing bubble and related loan practices in 2006, titled “The Housing Bubble and its implications for the Economy” and “Calculated Risk: Assessing Non-Traditional Mortgage Products”. Following the collapse of the subprime mortgage industry in March 2007, Senator Chris Dodd, the Chairman of the Banking Committee held hearings and asked executives from the top five subprime mortgage companies to testify and explain their lending practices. Dodd said that “predatory lending practices” had endangered home ownership for millions of people. In additional, Democratic senators such as Senator Charles Schumer of New York were already proposing a federal government bailout of subprime borrowers in order to save homeowners from losing their residences.

Causes
Observers and analysts have attributed the reasons for the 2001-2006 housing bubble and its 2007-10 collapse in the United Stages to “everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan”. Other factors that are named included “Mortgage underwriters, investment banks, rating agencies, and investors”, “low mortgage interest rates, low short-term interest rates, relaxed standards for mortgage loans, and irrational exuberance.” Politicians in both the Democratic and Republican parties have been cited for “pushing to keep derivatives unregulated” and “with rare exceptions” giving Fannie Mae and Freddie Mac “unwavering support”.

Extent
Home price appreciation has been non-uniform to such an extent that some economists, including former Fed Chairman Alan Greenspan, have argued that United States was not experiencing a nationwide housing bubble per se, but a number of local bubbles. However, in 2007 Greenspan admitted that there was in fact a bubble in the U.S. housing market, and that “all the froth bubbles add up to an aggregate bubble.”

Despite greatly relaxed lending standards and low interest rates, many regions of the country saw very little growth during the “bubble period”. Out of 20 largest metropolitan areas tracked by the S&P/Case-Shiller house price index, six (Dallas, Cleveland, Detroit, Denver, Atlanta, and Charlotte) saw less than 10% price growth in inflation-adjusted terms in 2001-2006. During the same period, seven metropolitan areas (Tampa, Miami, San Diego, Los Angeles, Las Vegas, Phoenix, and Washington, D.C.) appreciated by more than 80%.

Somewhat paradoxically, as the housing bubble deflates some metropolitan areas (such as Denver and Atlanta) have been experiencing high foreclosure rates, even though they did not see much house appreciation in the first place and therefore did not appear to be contributing to the national bubble. This was also true of some cities in the Rust Belt such as Detroit and Cleveland, were weak local economies had produced little house price appreciation early in the decade but still saw declining values and increased foreclosures in 2007. As of January 2009, California, Michigan, Ohio and Florida were the states with the highest foreclosure rates.

By July 2008, year-to-date prices had declined in 24 of U.S. metropolitan areas, with California and the southwest experiencing the greatest price falls. According to the reports, only Milwaukee had seen an increase in house prices after July 2007.

Side effects
Prior to the real estate market correction of 2006-2007, the unprecedented increase in house prices starting in 1997 produced numerous wide-ranging effects in the economy of the United States.

• One of the most direct effects was on the construction of new houses. In 2005, 1,283,000 new single-family homes were sold, compared with an average of 609,000 per year during 1990-1995. The largest home builders, such as D. R. Horton, Pulte, and Lennar, saw their largest share prices and revenues in 2004-2005. D. R. Horton’s stock went from $3 in early 1997 to all-time high of $42.82 on July 20, 2005. Pulte Corp’s revenues grew from $2.33 billion in 1996 to $14.69 billion in 2005.
• Mortgage equity withdrawals – primarily home equity loans and cash out refinancings – grew considerably since early 1990s. According to U.S. Federal Reserve estimates, in 2005 homeowners extracted $750 billion of equity from their homes (up from $106 billion in 1996), spending two-thirds of it on personal consumption, home improvements, and credit card debt.
• It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001-2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust.
• Rapidly growing house prices and increasing price gradients forced many residents to flee the expensive centers of many metropolitan areas, resulting in the explosive growth of exurbs in some regions.
• Extreme regional differences in land prices. The differences in housing prices are many due to differences in land values, which reached 85% of the total value of houses in the highest priced markets at the peak.  High land values contribute to high living costs in general and are part of the reason for the decline of the old industrial centers while new automobile plants, for example, were built throughout the South, which grew in population faster than the other regions

These trends were reversed during the real estate market correction of 2006-2007. As of August 2007, D.R. Horton’s and Pulte Corp’s shares had fallen to a third of their respective peak levels as new residential home sales fell. Some of the cities and regions that had experienced the fastest growth during 2000-2005 began to experience high foreclosure rates. It was suggested that the weakness of the housing industry and the loss of the consumption that had been driven by the withdrawal of mortgage equity could lead to a recession, but as of mid-2007 the existence of this recession had not yet been ascertained. In March 2008, Thomson Financial reported that the “Chicago Federal Reserve Bank’s National Activity Index for February sent a signal that a recession [had] already begun…”

The share prices of Fannie Mae and Freddie Mac plummeted in 2008 as investors worried that they lacked sufficient capital to cover the losses on their $5 trillion portfolio of loans and loan guarantees. On June 16, 2010 it was announced that Fannie Mae and Freddie Mac would be delisted from the New York Stock Exchange; shares now trade on over-the-counter market.

Housing market correction
Basing their statements on historic U.S. housing valuation trends, in 2005 and 2006 many economist and business writers predicted market corrections ranging from a few percentage points to 50% or more from peak values in some markets, and although this cooling had yet not affected all areas for the U.S., some warned that it still could, and that the correction would be “nasty” and “severe”. Chief economist Mark Zandi of the economic research firm Moody’s Economy.com predicted a “crash” of double-digit depreciation in some U.S. cities by 2007-209. In a paper he presented to a Federal Reserve Board economic symposium in August 2007, Yale University economist Robert Shiller warned, “The examples we have of past cycles indicate that major declines in real home prices-even 50 per cent declines in some places-are entirely possible going forward from today or form the not-too-distant-future.”

To better understand how the mortgage crisis played out, a 2012 report from the Universality of Michigan analyzed data from the Panel Study of Income Dynamics (PSID), which surveyed roughly 9,000 representative households in 2009 and 2011. The data seem to indicate that, while conditions are still difficult, in some ways the crisis is easing: Over the period studied , the percentage of families behind on mortgage payments fell from 2.2 to 1.9; homeowners who thought it was “very likely or somewhat likely” that they would fall behind on payments fell from 6% to 4.6% of families. On the other hand, family’s financial liquidity has decreased: “As of 2009, 18.5% of families had no liquid assets, and by 2011 this had grown to 23.4% families.”

Sources:

http://en.wikipedia.org/wiki/U.S._housing_bubble

subprimes

In finance, subprime lending (also referred to as near-prime, non-prime, and second-chance lending) means making loans to people who may have difficulty maintaining the repayment schedule, sometimes reflecting setbacks such as unemployment, divorce, medical emergencies, etc. These loans are characterized by higher interest rates, poor quality collateral, and less favorable terms in order to compensate for higher credit risk. Many subprime loans were packaged into mortgage backed securities (MBS) and ultimately defaulted, contributing to the financial crisis of 2007-2008.

Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market. Professor Harvey S. Rosen of Princeton University explained, "The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated-against, the people without a lot of money in the bank to use for a down payment."

The term subprime refers to the quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers. As people become economically active, records are created relating to the borrowing, earning and lending history. This is called a credit rating, and although covered by privacy laws the information is readily available to people with a need to know (in some countries, loan applications specifically allow the lender to access such records). Subprime borrowers have credit ratings that might include:

• limited debt experience (so the lender's assessor simply does not know, and assumes the worst), or
• no possession of property assets that could be used as security (for the lender to sell in case of default)
• excessive debt (the known income of the individual or family is unlikely to be enough to pay living expenses + interest + repayment),
• a history of late or sometimes missed payments so that the loan period had to be extended,
• failures to pay debts completely (default debt), and
• any legal judgments such as "orders to pay" or bankruptcy.

Lenders' standards for determining risk categories may also consider the size of the proposed loan, and also take into account the way the loan and the repayment plan is structured, if it is a conventional repayment loan, a mortgage loan, an endowment mortgage, and interest only loan, a standard repayment loan, an amortized loan, a credit card limit or some other arrangement. The originator is also taken into consideration. Because of this, it was possible for a loan to a borrower with "prime" characteristics (e.g., high credit score, low debt) to be classified as a subprime.

Although there is no single, standard definition, in the United States subprime loans are usually classified as those where the borrower has a FICO score below 640. The term was popularized by the media during the subprime mortgage crises or "credit crunch" of 2007. Those loans that do not meet Fannie Mae or Freddie Mac underwriting guidelines for prime mortgages are called "non-conforming" loans.  As such, they cannot be packaged into Fannie Mae or Freddie Mac MBS.

A borrower with an outstanding record of repayment on time and in full will get what is called an A-paper loan.  Borrowers with less-than-perfect credit 'scores' might be rated as meriting an A-minus, B-paper, C-paper or D-paper loan, with interest payments progressively increased for less reliable payers to allow the company to 'share the risk' of default equitably among all its borrowers. Between A-paper and subprime risk is Alt-A. A-minus is related to Alt-A, with some lenders categorizing them the same, but A-minus is traditionally defined as loans lacking full documentation. The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding.

Sources:

http://en.wikipedia.org/wiki/Subprime_lending

text encoding

A character encoding system consists of a code that pairs each character from a given repertoire with something else – such as a bit pattern, sequence of natural numbers, octets or electrical pulses – in order to facilitate the transmission of data (generally numbers or text) through telecommunication networks or for data storage. Other terms such as character set, character map, codeset, and code page are used almost interchangeably, but these terms have related but distinct meanings described below.

Early character codes associated with the optical or electrical telegraph could only represent a subset of the characters used in written language, sometimes restricted to upper case letters, numerals and some punctuation only. The low cost of digital representation of data in modern computer systems allows more elaborate character codes (such as Unicode) that represent more of the characters used in many written languages. Character encoding using internationally-accepted permits worldwide interchange of text in electronic form.

History
Common examples of character encoding systems include Morse code, the Baudot code, the American Standard Code for Information Interchange (ASCII) and Unicode.

Morse code was introduced in the 1840s and is used to encode each letter of the Latin alphabet, each Arabic numeral, and some other characters via a series of long and short presses of a telegraph key. Representations of characters encoded using Morse code varied in length.

The Baudot code, a 5-bit encoding, was created by Emile Baudot in 1870, patented in 1874, modified by Donald Murray in 1901, and standardized by CCITT as International Telegraph Alphabet No. 2 (ITA2) in 1930.

ASCII was introduced in 1963 and is a 7-bit encoding scheme used to encode letters, numerals, symbols, and device control codes as fixed-length codes using integers.

IBM's Extended Binary Coded Decimal Interchange Code (usually abbreviated EBCDIC) is an 8-bit encoding scheme developed in 1963.

The limitations of such sets soon became apparent, and a number of ad hoc methods were developed to extend them. The need to support more writing systems for different languages, including the CJK family of East Asian scripts, required support for a far larger number of characters and demanded a systematic approach to character encoding rather than the previous ad hoc approaches.

Code unit
The code unit is a unit used for character encoding.

• With US-ASCII, code unit is 7 bits.
• With UTF-8, code unit is 8 bits.
• With EBCDIC, code unit is 8 bits.
• With UTF-16, code unit is 16 bits.
• With UTF-3, code unit is 32 bits.

Then the encoding associates a meaning with each of some (or, usually, all) possible values for either a single code unit or a sequence of code units.

Unicode encoding model
Unicode and its parallel standard, the ISO/IEC 10646 Universal Character Set, together constitute a modern, unified character encoding. Rather than mapping characters directly to octets (bytes), they separately define what characters are available, their numbering, how those numbers are encoded as a series of "code units" (limited-size numbers), and finally how those units are encoded as a stream of octets. The idea behind this decomposition is to establish a universal set of characters that can be encoded in a variety of ways. To describe this model correctly one needs more precise terms than "character set" and "character encoding." The terms used in the modern model follow:

A character repertoire is the full set of abstract characters that a system supports. The repertoire may be closed, i.e., no additions are allowed without creating a new standard (as is the case with ASCII and most of the ISO-8859 series), or it may be open, allowing additions (as is the case with Unicode and to a limited extent the Windows code pages).  The characters in a given repertoire reflect decisions that have been made about how to divide writing systems into basic information units. The basic variants of the Latin, Greek, and Cyrillic alphabets, can be broken down into letters, digits, punctuation, and a few special characters like the space, which can all be arranged in simple linear sequences that are displayed in the same order they are read. Even with these alphabets, however, diacritics pose a complication: they can be regarded either as part of a single character containing a ltter and diacritic (known as a precomposed character), or as separate characters. The former allows a far simpler text handling system but the latter allows any letter/diacritic combination to be used in text. Ligatures pose similar problems. Other writing systems, such as Arabic and Hebrew, are represented with more complex character repertoires due to the need to accommodate things like bidirectional text and glyphs that are joined together in different ways for different situations.

A coded character set (CCS) specifies how to represent a repertoire of characters using a number of (typically non-negative) integer values called code points. For example, in a given repertoire, a character representing the capital letter "A" in the Latin alphabet might be assigned to the integer 65, the character for "B" to 66, and so on. A complete set of characters and corresponding integers is a coded character set. Multiple coded character sets may share the same repertoire; for example ISO/IEC 8859-1 and IBM code pages 037 and 500 all cover the same repertoire but map them to different codes. In a coded character set, each code point only represents one character, i.e., a coded character set is a function.

A character encoding form (CEF) specifies the convention of a coded character set's integer codes into a set of limited-size integer code values that facilitate storage in a system that represents numbers in binary form using a fixed number of bits (i.e., practically any computer system). For example, a system that stores numeric information in 16-bit units would only be able to directly represent integers from 0 to 65,535 in each unit, but larger integers could be represented if more than one 16-bit unit could be used. This is what CEF accommodates: it defines a way of mapping a single code point from a range of, say, 0 to 1.4 million, to a series of one or more code values from a range of, say, 0 to 65,535.

The simplest CEF system is simply to choose large enough units that the values from the coded character set can be encoded directly (one code point to one code value). This works well for coded character sets that fit in 8 bits (as most legacy non-CJK encodings do) and reasonably well for coded character sets that fit in 16 bits (such as early versions of Unicode). However, as the size of the coded character set increases (e.g., modern Unicode requires at least 21 bits/character), this becomes less and less efficient, and it is difficult to adapt existing systems to use larger code values. Therefore, most systems working with later versions of Unicode use either UTF-8, which maps Unicode code points to variable-length sequences of octets, or UTF-16, which maps Unicode code points to variable-length sequences of 16-bit words.

Next, a character encoding scheme (CES) specifies how the fixed-size integer code values should be mapped into an octet sequence suitable for saving on an octet-based file system or transmitting over an octet-based network. With Unicode, a simple character encoding scheme is used in most cases, simply specifying whether the bytes for each integer should be in big-endian or little-endian order (even this isn't needed with UTF-8). However, there are also compound character encoding schemes, which use escape sequences to switch between several simple schemes (such as ISO/IEC 2022), and compressing schemes, which try to minimize the number of bytes used per code unit (such as SCSU, BOCU, and Punycode). See comparison of Unicode encodings for a detail discussion.

Finally there may be a higher level protocol which supplies additional information that can be used to select the particular variant of a Unicode character, particularly where there are regional variants that have been 'unified' in Unicode as the same character. An example is the XML attribute xml:lang.

The Unicode model reserves the term character map for historical systems that directly assign a sequence of characters to a sequence of bytes, covering all of CCS, CEF and CES layers.

Character sets, code pages, and character maps
In computer science, the terms character encoding, character map, character set or code page were historically synonymous, as the same standard would specify a repertoire of characters and how they were to be encoded into a stream of code units – usually with a single character per code unit. The terms now have related but distinct meanings, reflecting the efforts of standards bodies to use precise terminology when writing about and unifying many different encoding systems. Regardless, the terms are still used interchangeably, with character set being nearly ubiquitous.

A code page usually means a byte-oriented encoding, but with regard to some suite of encodings (covering different scripts), where many characters share the same codes in most of all those pages. Well known code page suits are "Windows" (based on Windows-1252) and "IBM"/"DOS" (based on code page 437). Most, but not all, encodings referred to as code pages are single-byte encodings.

IBM's Character Data Representation Architecture (CDRA) designates with coded character set identifiers (CCSIDs) and each of which is variously called a charset, character set, code page, or CHARMAP.

The term code page does not occur in Unix or Linux where charmap is preferred, usually in the larger context of locales.

Contrasted to CCS above, a character encoding is a map from abstract characters to code words. A character set in HTTP (and MIME) parlance is the same as a character encoding (but not the same as CCS).

Sources:

http://en.wikipedia.org/wiki/Character_encoding

equator

An equator is the intersection of a sphere's surface with the plane perpendicular to the sphere's axis of rotation and midway between the poles. The Equator usually refers to the Earth's equator; an imaginary line on the Earth's surface equidistant from the North Pole and South Pole, dividing the Earth into the Northern Hemisphere and Southern Hemisphere. Other planets and astronomical bodies have equators similarly defined. The Equator is about 40,075 kilometers (24,901 mi) long; 78.7% is across water and 21.3% is over land.

The latitude of the Equator is by definition 0° (zero degrees). The Equator is one of the five notable circles of latitude on Earth, with the others being the two Polar Circles (the Arctic Circle and the Antarctic Circle) and the two Tropical Circles (The Tropic of Cancer and the Tropic of Capricorn). The Equator is the only line of latitude that is also a great circle. The imaginary circle obtained when the Earth's equator is projected onto the sky is called the celestial equator.

In its seasonal apparent movement across the sky the sun passes over the Equator twice each year, at the March and September equinoxes. At the moment of the equinox, light rays from the center of the sun are perpendicular to the surface of the earth at the point on the equator experiencing solar noon.

The Equator, like the Tropics, is not fixed. the true equatorial plane is always perpendicular to the Earth's spin axis; this axis is fairly stable but its position drifts about 15 meters (49 feet) during a year and the equator shifts likewise.

Equatorial seasons and climate
Seasons result from the yearly revolution of the Earth around the Sun and the tilt of the Earth's axis relative to the plane of revolution. During the year the northern and southern hemispheres are inclined toward or away from the sun according to Earth's position in its orbit. The hemisphere inclined toward the sun receives more sunlight and is in summer, while the other hemisphere receives less sun and is in winter (see solstice). At the equinox the Earth's axis is not tilted toward the sun and the day is about 12 hours long over most of the Earth.

The Equator lies mostly on the three largest oceans: the Pacific Ocean, the Atlantic Ocean, and the Indian Ocean. The highest point on the Equator is at the elevation of 4,690 meters (15,387 feet), found on the slopes of Volcán Cayambe [summit 5,790 meters (18,996 feet)] in Ecuador. This is slightly above the snow line, and is the only place on the Equator where snow lies on the ground.

Lowlands around the Equator generally have a tropical rainforest climate, also known as an equatorial climate, through cold currents cause some regions to have tropical monsoon climates with a dry season in the middle of the year. Usually, average annual temperature is around 30 °C (86 °F) during the day and 23 °C (73 °F) at night. Rainfall is very high, usually from 2,500 to 3,500 mm per year. Average rainy days are around 200 per year and average annual sunshine hours around 2000.

Equatorial countries and territories
The Equator traverses the land and/or territorial waters of 14 countries. Starting at the Prime Meridian and heading eastwards, the Equator passes through:

Coordinates	Country, territory or sea	Notes
0°N 0°E / 0°N 0°E / 0; 0 (Prime Meridian)	Atlantic Ocean	Gulf of Guinea
0°0′N 6°31′E / 0.000°N 6.517°E / 0.000; 6.517 (São Tomé and Príncipe)	São Tomé and Príncipe	Ilhéu das Rolas
0°0′N 6°31′E / 0.000°N 6.517°E / 0.000; 6.517 (Atlantic Ocean)	Atlantic Ocean	Gulf of Guinea
0°0′N 9°21′E / 0.000°N 9.350°E / 0.000; 9.350 (Gabon)	Gabon
0°0′N 13°56′E / 0.000°N 13.933°E / 0.000; 13.933 (Republic of the Congo)	Republic of the Congo	Passing through the town of Makoua.
0°0′N 17°46′E / 0.000°N 17.767°E / 0.000; 17.767 (Democratic Republic of the Congo)	Democratic Republic of the Congo	Passing 9 km south of central Butembo
0°0′N 29°43′E / 0.000°N 29.717°E / 0.000; 29.717 (Uganda)	Uganda	Passing 32 km south of central Kampala
0°0′N 32°22′E / 0.000°N 32.367°E / 0.000; 32.367 (Lake Victoria)	Lake Victoria	Passing through some islands of  Uganda
0°0′N 34°0′E / 0.000°N 34.000°E / 0.000; 34.000 (Kenya)	Kenya	Passing 6 km north of central Kisumu
0°0′N 41°0′E / 0.000°N 41.000°E / 0.000; 41.000 (Somalia)	Somalia
0°0′N 42°53′E / 0.000°N 42.883°E / 0.000; 42.883 (Indian Ocean)	Indian Ocean	Passing between Huvadhu Atoll and Fuvahmulah of the  Maldives
0°0′N 98°12′E / 0.000°N 98.200°E / 0.000; 98.200 (Indonesia)	Indonesia	The Batu Islands, Sumatra and the Lingga Islands
0°0′N 104°34′E / 0.000°N 104.567°E / 0.000; 104.567 (Karimata Strait)	Karimata Strait
0°0′N 109°9′E / 0.000°N 109.150°E / 0.000; 109.150 (Indonesia)	Indonesia	Borneo
0°0′N 117°30′E / 0.000°N 117.500°E / 0.000; 117.500 (Makassar Strait)	Makassar Strait
0°0′N 119°40′E / 0.000°N 119.667°E / 0.000; 119.667 (Indonesia)	Indonesia	Sulawesi (Celebes)
0°0′N 120°5′E / 0.000°N 120.083°E / 0.000; 120.083 (Gulf of Tomini)	Gulf of Tomini
0°0′N 124°0′E / 0.000°N 124.000°E / 0.000; 124.000 (Molucca Sea)	Molucca Sea
0°0′N 127°24′E / 0.000°N 127.400°E / 0.000; 127.400 (Indonesia)	Indonesia	Kayoa and Halmahera islands
0°0′N 127°53′E / 0.000°N 127.883°E / 0.000; 127.883 (Halmahera Sea)	Halmahera Sea
0°0′N 129°20′E / 0.000°N 129.333°E / 0.000; 129.333 (Indonesia)	Indonesia	Gebe Island
0°0′N 129°21′E / 0.000°N 129.350°E / 0.000; 129.350 (Pacific Ocean)	Pacific Ocean	Passing 570 m north of Waigeo island,  Indonesia Passing 13 km south of Aranuka atoll,  Kiribati Passing 21 km south of Baker Island,  United States Minor Outlying Islands
0°0′N 91°35′W / 0.000°N 91.583°W / 0.000; -91.583 (Ecuador)	Ecuador	Isabela Island in the Galápagos Islands
0°0′N 91°13′W / 0.000°N 91.217°W / 0.000; -91.217 (Pacific Ocean)	Pacific Ocean
0°0′N 80°6′W / 0.000°N 80.100°W / 0.000; -80.100 (Ecuador)	Ecuador	Passing 24 km north of central Quito, near Mitad del Mundo
0°0′N 75°32′W / 0.000°N 75.533°W / 0.000; -75.533 (Colombia)	Colombia	Passing 4.3 km north of the border with Peru
0°0′N 70°3′W / 0.000°N 70.050°W / 0.000; -70.050 (Brazil)	Brazil	Amazonas Roraima Amazonas Pará Amapá Pará - islands in the mouth of the Amazon River
0°0′N 49°20′W / 0.000°N 49.333°W / 0.000; -49.333 (Atlantic Ocean)	Atlantic Ocean

Despite its name, no part of Equatorial Guinea's territory lies on the Equator. However, its island of Annobón is 155 kilometers (100mi) south of the Equator, and the rest of the country lies to the north.

Latitude
Latitude (φ) is a geographic coordinate that specifies the north-south position of a point on the Earth's surface. Latitude is an angle (defined below) which ranges from 0° at the Equator to 90° (North or South) at the poles. Lines of constant latitude, or parallels, run east–west as circles parallel to the equator. Latitude is used together with longitude to specify the precise location of features on the surface of the Earth.

A graticule on a sphere or an ellipsoid. The lines from pole to pole are lines of constant longitude, or meridians. The circles parallel to the equator are lines of constant latitude, or parallels. The graticule determines the latitude and longitude of position on the surface.

The graticule, the mesh formed by the lines of constant latitude and constant longitude, is constructed by reference to the rotation axis of the Earth. The primary reference points are the poles where the axis of rotation of the Earth intersects the reference surface. Planes which contain the rotation axis intersect the surface in the meridians and the angle between any one meridian plane and that through Greenwich (the Prime Meridian) defines the longitude: meridians are lines of constant longitude. The plane through the centre of the Earth and orthogonal to the rotation axis intersects the surface in a great circle called the equator. Planes parallel to the equatorial plane intersect the surface in circles of constant latitude; these are the parallels. The equator has a latitude of 0°, the North pole has a latitude of 90° north (written 90° N or +90°), and the South pole has a latitude of 90° south (written 90° S or −90°). The latitude of an arbitrary point is the angle between the equatorial plane and the radius to that point.

A perspective view of the Earth showing how latitude (φ) and longitude (λ) are defined on a spherical model. The graticule spacing is 10 degrees.

Longitude
Longitude is a geographic coordinate that specifies the east-west position of a point on the Earth's surface. It is an angular measurement, usually expressed in degrees and denoted by the Greek letter lambda (λ). Points with the same longitude lie in lines running from the North Pole to the South Pole. By convention, one of these, the Prime Meridian, which passes through the Royal Observatory, Greenwich, England, was intended to establish the position of zero degrees longitude. The longitude of other places was to be measured as the angle east or west from the Prime Meridian, ranging from 0° at the Prime Meridian to +180° eastward and −180° westward. Specifically, it is the angle between a plane containing the Prime Meridian and a plane containing the North Pole, South Pole and the location in question.

Drawing of Earth with Longitudes

Circles of latitude
A circle of latitude on the Earth is an imaginary east-west circle connecting all locations (not taking into account elevation) having a given latitude. A location's position along a circle of latitude is given by its longitude.

Circles of latitude are often called parallels because they are parallel to each other – that is, any two parallels are everywhere the same distance apart. (Since the Earth is not spherical the distance from the equator to 10 degrees north is slightly less than the distance from 10 to 20 degrees north.)

Circles of latitude become smaller the farther they are from the equator and the closer they are to the poles. A circle of latitude is perpendicular to all meridians, and is hence a special case of a loxodrome.

The latitude of the circle is (roughly) the angle between the Equator and the circle, with the angle's vertex at the Earth's centre. The Equator is at 0°, and the North and South Pole are at 90° north and 90° south respectively. There are 89 integral (whole degree) circles of latitude between the Equator and the Poles in each hemisphere, but these can be divided into more precise measurements of latitude, and are often represented as a decimal degree (e.g. 34.637°N) or with minutes and seconds (e.g. 22°14'26"S). There is no limit to how precisely latitude can be measured, and so there are an infinite number of circles of latitude on Earth.

Great circle
A great circle, also known as an orthodrome or Riemannian circle, of a sphere is the intersection of the sphere and a plane which passes through the center point of the sphere. (A small circle is the intersection of the sphere and a plane which does not pass through the center.) Any diameter of any great circle coincides with a diameter of the sphere, and therefore all great circles have the same circumference as each other, and have the same center as the sphere. A great circle is the largest circle that can be drawn on any given sphere.

Solstice
A solstice is an astronomical event that occurs twice each year as the Sun reaches its highest or lowest excursion relative to the celestial equator on the celestial sphere. As a result, on the day of the solstice, the Sun appears to have reached its highest or lowest annual altitude in the sky above the horizon at local solar noon. The word solstice is derived from the Latin sol (sun) and sistere (to stand still), because at the solstices, the Sun stands still in declination; that is, the seasonal movement of the Sun's path (as seen from Earth) comes to a stop before reversing direction. The solstices, together with the equinoxes, are connected with the seasons. In many cultures the solstices mark either the beginning or the midpoint of winter and summer.

Illumination of Earth by Sun at the northern solstice.

Illumination of Earth by Sun at the southern solstice.

The term solstice can also be used in a broader sense, as the date (day) when this occurs. The day of the solstice is either the longest day of the year (in summer) or the shortest day of the year (in winter) for any place outside of the tropics.

Equinox
An equinox occurs twice a year (around 20 March and 22 September), when the plane of the Earth's equator passes the center of the Sun. At this time the tilt of the Earth's axis is inclined neither away from nor towards the Sun. The term equinox can also be used in a broader sense, meaning the date when such a passage happens. The name "equinox" is derived from the Latin aequus (equal) and nox (night), because around the equinox, night and day are about equal length. Times of sunset and sunrise vary with an observer's location (longitude and latitude), so these dates likewise depend on location and do not exist for locations close to the Equator. To avoid this ambiguity the term equilux is sometimes used in this sense.

During an equinox, the Earth is not tilted toward or away from the Sun and the length of the day is the same at all points on the Earth's surface.

During an equinox, the Earth is not tilted toward or away from the Sun and the length of the day is the same at all points on the Earth's surface.

Sources:

http://en.wikipedia.org/wiki/Equator
http://en.wikipedia.org/wiki/Latitude
http://en.wikipedia.org/wiki/Longitude
http://en.wikipedia.org/wiki/Circle_of_latitude
http://en.wikipedia.org/wiki/Great_circle
http://en.wikipedia.org/wiki/Solstice
http://en.wikipedia.org/wiki/Equinox