How Bad Is The Subprime Mortgage Crisis?
91The inventory of unsold homes continues to grow; prices will continue to fall.
Subprime Mortgage Crisis
To understand the nature of the subprime mortgage crisis and how we got ourselves into such an incredible mess (as well as what that mess really is), we need to go back several decades and examine how the financial markets have evolved during that period of time.
We'll start with a mathematician by the name of John Forbes Nash. If that name sounds vaguely familiar, it's probably because his life was portrayed in the movie "A Beautiful Mind" starring Russell Crowe.
While the film did a great job of highlighting Mr. Nash's mental illness, it did a poor job of informing the audience of the important role his game-theory mathematical equations were to modern day finance.
The secondary mortgage market would not have been possible without the mathematical equations that he developed.
Before the introduction and development of the secondary mortgage market, borrowing money to buy a home was rather simple. You applied for a mortgage loan at your bank, and if your banker determined that you were likely to be able and willing to repay the loan, he would loan some of the bank's deposits to you for the purchase of the house.
The bank needed the deposits in order to make the loan. And if the bank didn't have enough money in its deposits, it didn't make the loan.
Rather than come right out and announce that they didn't have enough deposits available to make any more home loans, banks would increase the interest rate charged and borrowers would choose to apply at a different bank that offered lower rates.
It was a simple illustration of supply and demand working properly in the free market. If there weren't enough deposits at the banks, interest rates would rise and borrowing would slow.
If the banks were flush with deposits, interest rates would come down as the banks competed with each other for additional business.
The free market would find the perfect equilibrium between the borrowers and the banks through the constant adjustment of interest rates.
The mathematical equations of John Nash made it possible for investment banks to combine those loans into packages and sell those packages to investors.
By being able to tap into larger pools of money besides just deposits at banks, borrowers seeking a home mortgage loan were able to obtain lower rates on their mortgages.
Nash's equations simply made for more efficient means for borrowers to tap into large pools of money that were available.
The loans were still being made one at a time. But the banks, with the help of Wall Street (which received a commission for facilitating the transaction), could combine hundreds of loans and sell the package to very large investors, such as insurance companies, mutual funds, foreign companies, and even foreign governments.
At that point in time, there still wasn't a problem. That was how the secondary mortgage market formed and operated in the 1980's.
Wall Street Firms Got Greedy
Wall Street Corrupts the process
But things begin to change in the 1990's. Wall Street wasn't satisfied with just getting a commission. As usual, Wall Street wanted more: more money, a bigger piece of the pie, and more profits. How else could all those Wall Street people afford to buy multi-million dollar homes in the Hamptons?
And this is where the problem begins.
Wall Street made some changes to what was up to that point a very straightforward process. Wall Street added derivatives to the mix.
Instead of just packaging a group of say, 1,000 mortgages together and selling them for the interest that they paid, Wall Street included complicated, opaque derivatives in the package.
The first instance of credit derivatives being used on Wall Street was 1981 when Salomon Brothers arranged for IBM and the World Bank to swap debt payments in Swiss Francs and German Marks for dollar obligations.
The practice spread like wildfire on a dry tundra during the 1990's.
Wall Street firms deliberately structured these packages to be opaque and confusing. That way, the investors weren't really sure what they were getting.
Let's take a look at a simple example to expose the truth. Suppose 500 people each owe me $10.00. That is $5,000 in total owed to me. These people are paying me seventy cents per year in interest (7%).
Suppose that I package the 500 loans together and sell them to you. You would then be able to collect the interest as well as the principal when it is paid back. We will call this a five thousand dollar package.
I might sell this package of loans to you for $4,925 to allow for approximately 1.5% of the loans not getting repaid.
Now, what if that five thousand dollar package didn't contain 500 loans of ten dollars each? What if it only contained something like 200 or 300 loans for ten dollars each, and of those, more than half were subprime and of questionable ability to repay, and the remainder of the "five thousand dollar package" was used lottery tickets?
Would you still want to pay $4,925 for a package of those loans? Of course not! You would only be owed about half of what you paid, and you probably will not receive even half, because so much is owed by borrowers with poor credit ratings who have difficulty making payments on time. There is no way that "package" would be worth $5,000.
Yet Wall Street put packages like that together. Where was the value for the other half of the package?
From derivatives.
Derivatives are nothing more than speculative bets, thus the example of used lottery tickets.
CDO's (collateralized debt obligations) are comprised of a combination of mortgages and derivatives very similar to the above illustration.
And therein lies the problem. The value of TRILLIONS of dollars of CDOs is based upon complex, opaque derivatives of very little if any tangible value. The latest figures that the amount of derivatives currently outstanding worldwide exceeds $540 TRILLION.
So here we are in 2008 and these mortgage-backed "securities" have been created by Wall Street by the trillions upon trillions of dollars in the last 20 years.
The housing market is going one way: backwards.
And everything worked fine, until the housing market turned down and just a few too many subprime borrowers begin to default on their loans.
And when those borrowers stopped making their payments, some holders of the mortgage back securities wanted to cut their losses and sell.
And then comes the 500 trillion dollar question: sell to whom?
You see, every other holder of mortgage-backed securities was experiencing the same thing: an increased number of defaults.
These packaged mortgage securities are not traded on an exchange like stocks. They are unregulated by the government. The buying and selling of them is done privately.
The problem is that the largest portion of value in these various mortgage-backed securities is based upon derivatives that are of "questionable" value at best. When a hedge fund, bank, or insurance company decided to sell their "investments" in CDO's in the later summer of 2007, there simply were no buyers.
The genie was let out of the bottle, and now there is no way the genie can be put back into the bottle again. Specifically, the genie is the fact that the CDO's, MBS's, and most "structured finance" products are not worth anywhere near what they are supposed to be worth, or what Wall Street firms claimed that they were worth.
The buyers of these financial products have now realized en masse that they have been sold a package that isn't worth anything near what they paid.
Needless to say, investment buyers around the world have stopped purchasing mortgage-backed securities, resulting in the funding for mortgages drying up. Everything from First time home buyer loans to jumbo mortgages are now much more difficult to obtain.
And this will cause massive changes to the economy through a domino-type effect. The first area to be effected has been real estate. It has already started, but what you are seeing is just the beginning of the first inning, we've still got 8 and one-half innings to go.
Congressman Ron Paul question the Federal Reserve Chairman on the housing crisis.
Basically, the secondary mortgage market is barely functioning, if at all. Banks now have to lend from their own deposits. Needless to say, last year, when banks and mortgage companies could sell the loan as part of a package, they were not nearly as concerned with the borrower being able to pay back the loan. That would become somebody else's problem.
Now that banks have to loan from their own funds, they have become very, very concerned about the borrower's ability to repay. Banks don't want to take losses. They want profits. And they are not going to loan to questionable borrowers.
That mean that millions of people who previously qualified for mortgage loans under the old rules no longer qualify. Thankfully, many states still provide first time home buyer grants to help 1st time buyers qualify for their first mortgage.
The days of the "no-doc" loan are gone. The days of the real estate boom are gone. We are now headed rapidly in the other direction: real estate bust.
In the coming months, billions upon billions worth of mortgages that had low initial "teaser" rates will be resetting higher. Much higher. Many of these people will not be able to afford to keep their home.
Foreclosures are already increasing rapidly. Expect this trend to continue for at least the next 2 years. It may take 3 to 4 years for the glut of foreclosures and extra inventory to be worked out of the system.
Because of this, look for real estate prices to continue to fall. Again, expect this trend to also continue for the next 2 to 4 years. But even when it does come back, without a prosperous secondary mortgage market, real estate will never be like it was in the late 1990's and early 2000's.
When you consider that construction and real estate accounts for 20% of the US economy, expect real estate to drag down the rest of the economy. Millions of construction workers, real estate brokers, mortgage loan officers, as well as workers in related industries such as appliance manufacturers, carpet manufacturers, window companies, etc, will all be searching for other lines of work.
The level of business in real estate and construction will not support the amount of labor and careers that it did 2 years ago. It may not even support half of it.
Warning: The Television Talking Heads Will Announce Over and Over that the "Worst is Behind Us"
What else can they do? Do you think they can tell the truth and announce that it is going to get worse? That would cause consumers to prepare for the coming hard times by reducing their spending and hoarding cash. The very action of consumers reducing spending would hurt an already critically-ill economy even more.
Forget it. You will not be told the truth by the mass media.
The worst will not be behind us until the mess has been cleaned out of the system, and that is going to take, at a very minimum, 2 to 3 more years. That's a minimum. It could be much longer, depending upon how the government handles the mess.
Governments usually don't do what's best for the population as a whole. Governments typically do what's best for the few well-connected. Expect big, fat-cat bankers and Wall Street Firms to be bailed out, but very little in the way of real help for the common man.
Unfortunately, the common man will suffer the most.
Despite "official" government statistics that proclaim the economy isn't that bad off, the truth will be the exact opposite. The economy is in a downward spiral that will not be stopped.
The only way to stop it would be for banks to go back to their loose lending standards and for the secondary mortgage market to go back to doing billions upon billions of dollars per week in CDO's and MBS's (collateralized debt obligations and mortgage-backed securities).
But investors no longer want to purchase CDO's and MBS's that are full of toxic derivatives, now that the secret about the true value of those derivatives is out in the open. And no bank wants to make reckless loans with their own capital at risk. That only leaves us on the path we are on: a cleaning out of the real estate mess.
Lower interest rates will not help. The interest rates on home mortgages could go to zero. But what good would that do if the banks will not grant you a loan? It doesn't matter what the published interest rate is. If the bank won't give you a loan, the interest rate is merely for show.
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Thanks for the kind comment. :)
Thanks for a comprehensible explanation of a complex subject!You've really helped me to "get it". The weird thing of course is when you live in a country that didn't have sub-prime lending we still get hit with the interest rate - though the US$ has certainly gone done a lot against most other currencies which I know is related too. Little suggestion - break up your text using multiple text capsules or using heading styles to make it eaiser to scan!
Hi Lissie,
Thanks for the kind comments and the helpful suggestions!
However, I am a little ashamed to say that I am not a writer, and thus, I'm not very experienced at it. I am very experienced in business, but not writing.
That being said, can I ask what you mean by "multiple text capsules"?
Thanks again. :)
well you did ask - so this is not overly promotional - I wrote about hub layout tricks here: http://hubpages.com/hub/How-to-Create-an-Attractiv hope this helps !
Very nice! We do see things from a similar point of view. You know a lot about the market for a guy in construction. What gives? I would venture to say that the mass majority does not understand what you described or how complex these structures are.
Lissie,
Thanks for the help! I made some changes based upon your advice. it is much appreciated.
Well done hub. The subprime crisis is just the tip of the iceberg. It has been bundled and sold in the form of MBS(Mortgage based securities) that will affect the banks around the world. Add to it, the credit card defaults and voluntary foreclosings by homeowners with good credit so that they can buy a similar home at dead prices from the banks. It is a vicious circle and no body knows how it is going to pan out. Keeping my fingers crossed. Keep publishing.
Thanks for that explanation. I was puzzled as to why the crisis, since there were still houses there, Even if overpriced, they were not worth nothing. Now, with your description of the derivatives involved as being of little value, the whole thing makes sense. I had not been looking for this explanation, just tripped over it, but a nice find. Well done.
An iceberg, just for illustration.
Sorry about the iceberg above - the jpg wasn't accepted and I can't find a way to edit my comment. Hope my dumbness won't detract from your great hub.
Very helpful article to understand the high level problem. Just a few questions...
1. Do you have any idea what % of mortages are being foreclosed on? How does this compare to the overall foreclosure rates over the past 10-20 years?
2. What % of the Total mortgage industry (in $) is being foreclosed on?
3. You also mention that even if interest rates went to 0%, it wouldn't matter b/c banks wouldn't give loans anyways. Can you explain why they wouldn't if the person applying had an excellent credit rating? You make it sound like if someone (including investors) had great credit, job history, and was very liquid that the bank wouldn't offer them a loan. This seemed like a pretty extreme statement.
4. For the vast majority (I'm assuming) of individuals who are not falling behind on mortgage payments, wouldn't this group's increase in spending (due to the lower interest rates) also help alleviate some of the related industry woes that you mentioned?
I did enjoy the article but I feel that all I hear lately is that "the worst is yet to come" and that stories often lack hard data. For example, looking back on this story I feel pretty discouraged about the situation but you only used 1 real number in terms of the actual problem ($540 trillion) and I'm still a little unclear about how much of this number is an actual "problem".
ColeMartin, Thank you. I'll respond on your hub.
Beachartist, thanks for the kind words.
Dave, thanks for the kind comments. :)
Ross, those are excellent questions, thanks for taking the time to think them through. I'll try my best to provide the answeres here, but I will likely run out of space.
#1: Right now, nationally, it is about 2%. Detroit is the worst, their foreclosure rate is currently 4.9%. Statistically, over the last 20 years the annual foreclosure rate has averaged well under 1%.
#2. More than half of the mortgages with low teaser rates have yet to reset, so the foreclosure rate will increase, especially with the downward sprial we are currently in. It is 2% now, but if we go at 2% per year for the next 4 years, that will end up being about 10% of all mortgages.
#3. Banks don't have unlimited amounts of money to lend. Even if a borrower has perfect credit and far more than enough income, if the bank has too many bad real estate loans, they simply will refuse to make any more - under any circumstances. I've dealt with that personally in the past. Banks have regulators that examine their portfolios. They have requirements to meet. Too many bad real estate loans will mean no more real estate lending regardless of how worthy the borrower is. In the past 2 decades, this hasn't mattered because the banks sold the loans and didn't keep them in their portfolios. However, the secondary mortgage market is in shambles because of the derivative problem, and banks can't sell these loans any more.
#4. No, I don't believe that group can make up for the decline in spending. The amount of money tha was spent into the economy from repeated refinancings as house values went up rapidly was too big. That amount is in excess of $1trillion. Not only is that spending power now gone, it is in reverse. People with good credit and who are not behind on their mortgage cannot go on a spending spree wild enough to replace what this country went trhough from 2003 to 2006. I wish it wasn't that way, but it's what all the facts point to.
Banks cannot make money unless they lend....this whole thing is a whiplash reaction. Even strong borrowers are having trouble getting loans...especially self-employed applicants. I know of some Americans who've spent the last 11 years in Europe where they own their country villa free and clear, and have good income. But they don't borrow or charge, they pay as they go, and they save. Now they would like to sell their European home at a huge profit, and put more than half down on a home here in states.
No go say the lenders....you have no credit score! Even student loans have disappeared from their credit report. The banks have gone past the point of cation to sheer panic and paranoia. Can't make money that way. The banks are going to have to think outside the box, or they deserve to go under.
Great Hub. Very informative and educational. I definitely have a better understanding of the issue now. I do have to agree with the comment from Mary Tinkler though. Banks are having somewhat of a whiplash reaction and are turning down lowns they should fund.
Mary, Those are excellent points. Because of what went on with derivatives, banks do have reason for their paranoia. I agree 100% that they do deserve to go under. Unfortunately, those at the top are very well connected politically. They will be considered "too big to fail" and will get bailouts. The bailouts are always disguised as "helping the public", but in reality it is a direct subsidy to the big banks as well as the investment banks. Meanwhile, the people at the top of the structure continue to make 7 and 8 figure salaries and bonuses. It's not right.
Keith, if the banks don't have the money, how can they make the loan? I've personally been through that scenario with a bank that failed in the Northeast in the early 1990's.
Banks have regulators that examine their portfolios. They have requirements to meet. Too many bad real estate loans will mean no more real estate lending regardless of how worthy the borrower is. In the past 2 decades, this hasn't mattered because the banks sold the loans and didn't keep them in their portfolios. However, the secondary mortgage market is in shambles because of the derivative problem, and banks can't sell these loans any more, therefore they have to fund the loan themselves out of deposits. They only have so many deposits, and when those are loaned out, they can't make any more loans, regardless of how creditworthy the borrower is.
This one gets a big thumbs up from me-- wellreasoned, well laid out explanation of what's happening. And of course, I like it because you tell the unvarnished truth and I agree with you 100%:-) We've had piggies at the trough both on Wall Street and in government for the last decade. I used to sell residential real estate, and I just knew this house of cards was going to fall in sometime. What amazed me was that it took so long. I also didn't see the global ramifications. Thanks for telling it like it is--we're not out of the woods yet by a long shot. Please keep writing. You'vegot at least one new fan in me!
Robie, Thanks for the kind words. Unfortunately, I coouldn't agree with you more. We are not out of the woods yet. From what I see, the worst is still ahead of us. The complete financial system is falling apart because of the derivatives mess. Every day I see more and more stories about it. Best thing to do is develop a financial cushion for a rainy day. Storm clouds are on the horizon.
Yeah, well I've battened down the hatches to the extent that I can. God bless this ship and all who sail in her:-)
Thank you for this article. It is excellent. Greed is the correct description of the subprime debacle. The amount of money made by Wall Street on the sale of these loans to investors would make a person's head spin. I am not certain but did some of these loans receive a AAA rating? Although banks may have tightened up their lending. I just needed to mention they are not the only lending institutions making mortgage loans.
Hi ebc, thanks for the kind comments. Yes, these loans were packaged by Wall Street investment baking firms into Mortgage-Backed Securities (MBS). This package was mixed with derivatives and the firm doing the packaging then paid a fee to a rating agency to get AAA rating. These loans should have never been given AAA rating, and derivatives should have never been allowed to be mixed in.
Now this financial system is being recognized more and more for what it really is: smoke and morrors.
Kudos to you, Greg from Maine. An excellent explanation of a complex subject.
You studiously avoided politics, but you cited the core of the problem with this statement, and I quote:
"These packaged mortgage securities are not traded on an exchange like stocks. They are unregulated by the government. The buying and selling of them is done privately."
You use the word "government," but, in truth, it is the Bush Administration , and Republicans in general, that supports and defends -- and refuses to regulate -- the naturally greedy "private" sector.
Thanks for adding sunshine to this issue.
Mr. W. F. Torpey, you are an astute observer. Thank you for the kind comments.
Banks were in trouble the day they disconnected theselves from the borrowers. Mortgage brokerage and their incentive packages made it appealing to the sales force to sell bad loans. Now they are stuck with a lot of right offs. I would venture to say half the guys trading these derivatives don't know what they are worth. Read Liars Poker by Michael Lewis. It details the birth of these securities and the personalities that sell them.
Ryan, I couldn't agree more.
Point 1: our parents' generation would have been horrified by the notion of banks lending money to people who could not afford to pay it back if the interest rate rose. Time was when a mortgage was difficult to get - for my my first house (in 1978) I had to wait six months for a mortgage calculated on three times my salary (most lenders would only give two-and-a-half). Things seem to be a bit different now, but are they any better?
Point 2: the international ramifications are here already. A UK bank, Northern Rock, nearly went bust this year, because of its dependence on US subprime packages, and it has just been rescued by being taken into public ownership, so it is owned by the government for the forseeable future. It is therefore now the safest bank there is, which is having consequences for all the other banks that do not have this guarantee.
Hi Indexer, Those are both very accurate points. I couldn't agree more. The only thing I would add is that although the ramifications are already here, they are not going to go away any time soon.
Thanks for your comments.
Very well written hub. Where did you get the 540 Trillion number? That seems bigger than the world economy, and if it crumbled, wouldn't that make the world worthless?
I agree it is 2+ years to work this crisis out, and looking at the 7 Billion loss at Societe Generale in France, I suspect the big players have a few surprises to announce.
Hi Make Moneyonline,
The US share of the $540 trillion number, which is by far the largest portion, comes directly from the Office of the Comptroller of the Currency, which is part of the US Treasury Department. The OCC breaks down the number by category, so you have to do some addition.
And yes, it is very much bigger than the world economy, which amounts to $64 trillion annually. The crumbling is very real, it started last year, and continues to get worse with each passing month. The current state of the financial system that was put into place with the Bretton Woods Agreement is much worse now than last year. The crumbling continues without slowing down.
Does it make the world worthless? Not exactly. The infrastructure is not harmed. Roads, bridges, buidlings, factories, schools, power plants, malls, stadiums, etc are all still in existence and usable. What is rapidly becoming unusable is the financial structure of the world.
This isn't the first time it fell apart, but the previous time it was able to be repaired. This time there was so much abuse, and so many players took so much from the system and left everyone holding the bag, that it is my opinion the system cannot be repaired.
The financial system is worthless.
Do a search on Wikipedia for Bretton Woods Agreement. It was instituted by the world financial powers in 1944. It faced a crisis in 1971 and was amended. This time it looks to me that the system will collapse. It is not built on solid principals. There is far too much abuse of the system. Just like any structure built on a faulty foundation, it is doomed to failure. The only question is how long it will last. I believe not much longer. Just my opinion.
What an excellent hub - this is way i love the internet, i was not even looking for this specific information but it's a subject that affects us all - even from down here in Australia
John, Thanks for the kind comments. And unfortunately, the US has spread this toxic derivative paper all over the world, so you are correct to expect some consequences to reach you even in Australia.
Hello Greg,
I just wanted to comment or ask what is the impact of our subprime crisis on foreign mortgage markets? Are not most of the European markets based on variable rate interests? How have they (the Europeans) managed to avoid a similar situation?
Regards,
Thomas T.
Hi Thomas,
Thanks for reading my hub and taking the time to ask a question. Unfortunately, the Europeans have not managed to avoid the subprime/derivatives crisis. I see story after story everyday of "subprime losses" from banks all over the world.
The term "subprime losses" is a code word for derivatives. Wall Street cleverly included derivatives into the subprime packages. If the problem was just subprime borrowers not being able to pay, it would only be 5% bad as it really is. 95% of the problem is a result of the derivatives.
Here is a link to a news story dated yesterday about German banks and the Subprime crisis:
http://www.spiegel.de/international/business/0,151
And here is one about Japan:
http://www.busrep.co.za/index.php?fSectionId=&fArt
I read one this morning about Australia but I couldn't find the link. Nevertheless, the problem has spread worldwide, and now we must all pay the piper for a mess that we didn't create.
Thomas T,
You might also like to explore the Northern Rock story. This is a major UK bank that nearly went bust as a direct consequnce
Thomas T,
You might also like to explore the Northern Rock story. This is a major UK bank that nearly went bust as a direct consequence of the subprime crisis, and has now been nationalised, with untold consequences for the whole UK economy. It has been estimated that the bill will come to £3,500 for every man, woman and child in the UK!
Greg this was such an excellent hub. It explained the crisis without confusing the reader.
It is very true that if you tell people how bad the economy is, they will make it worse just for preparing for a fall out. If you don't tell them how bad it is, they won't prepare.
Hi Sunstreeks,
Thanks for your kind comment. Yes, if masses of people cut back on their spending and started to prepare for a rainy day, it would cause a slowdown of the economy. However, if I see a house on fire in the middle of the night, I'm the type of person who would go knock on their door to wake them up and alert them to the fire rather than not bother them and let them sleep through the catastrophe. So I tell the few people who will listen about the coming financial storm. The news is so disturbing that most people choose not to believe it.
As for me, I'll live by the boy scout motto, "be prepared."
I appreciate your well-thought out article concerning what is becoming a national disaster. Personally, I benefitted greatly from the construction boom of the late 1990s through mid 2005 for I owned and operated a primary window distribution company for 12 years. In 3Q 2006, the decline was already in order. I luckily saw this and transferred my accounts to another wholesaler. I'm still in the construction supply business but in a substantially diminished role. Gone are the days in which prosperity was commonplace. Many of my former clients and friends have gone away from the business altogether or drastically altered their means of doing business. Keep up the informative work. I appreciate it.
Thanks Rob, for your kind comments. Glad to hear to saw what was happening and was able top reposition yourself to avoid disaster. I agree with you in what you describe as "becoming a national disaster." From the information that I have and continue to gather, the wrost is yet to come. Tragically, your description of national disaster may turn out to be spot on accurate. I wish there was something more that I could do to prevent it, but there isn't. All I can do is point out what is going on and hope that people take some precaution that will lessen the economic pain in thier situation.
Thanks for taking the time to read my hub.
Thanks for an excellent and easy-to-understand explanation of what the politician and news media won't tell us! Frightening. Maybe it's time to head to the farm.
Hi Omegareport, thanks for your kind comments. Having a private garden at home if you have the space makes sense for several reasons. And if you have a farmer friend, now is probably not a good time to sever that relationship.
Greg,
I have been a member of an online community for Realtors and mortgage brokers for about a year now. I joined the community to try to learn more about mortgages, as my business revolves around mortgage lending. Not once on this other site was the subprime meltdown expressed so thoroughly and eloquently. Cheers to you!
Greg,
That was so clear and consice.
In the last 10 minutes I have spent reading your post, i have learned more about this subprime meltdown then what i have gathered from talk shows like bob brinker money talk, newspaper articles on this subject in the last YEAR.
I think I will now read ALL of your other hubs and.. LEARN!
Thank you very much,
M@
Greg,
That was so clear and consice.
In the last 10 minutes I have spent reading your post, i have learned more about this subprime meltdown then what i have gathered from talk shows like bob brinker money talk, newspaper articles on this subject in the last YEAR.
I think I will now read ALL of your other hubs and.. LEARN!
Thank you very much,
M@
MphsBlues & M@tt, Thank you both for your kind comments. The point of the article is that the situation is much, much worse than being reported in the major media. I have written another hub giving an example of derivative abuse. It is another example of how the greed of Wall Street has corrupted things, and now all of us are going to be left holding the bag. And it is one giant bag.
Nicole, thanks for the comments.
Manoharv2001, thank you.
Greg,
What do you think about the situation now? I noticed that banks are now letting some more clients get loans than a few months before. There is someting new? or it's just a feeling?
PD: count me in on your project ;-)
Luis Cordova
Greg, I am Srinivas from India . I always imagined that the Subprime crisis was caused by loanees defaulting on their loand . Bu I was not sure of the why of it . You have provided these answers in a very simple way . Thank You .
Please do take time to look at some of the hubs I have made by clicking on the following links :-
http://hubpages.com/_39a3x4c9mtn25/hub/The-Buckyba
http://hubpages.com/_39a3x4c9mtn25/hub/Hampi---A-h
http://hubpages.com/_39a3x4c9mtn25/hub/Indian-Prid
http://hubpages.com/_39a3x4c9mtn25/hub/Advertising
Hi Greg
Great Hub page - Now that its hit us on the other side of the pond its good to see a different view of how this mess occurred. We always say that whatever happens in the states will follow over here and thats exactly whats happening right now in the UK.
First it was the lack of interbank funds, next it was lender withdrawing products, almost half the schemes that were around 4 months ago have now disappeared, this include prime products not just subprime. Next it was lenders increasing the amount of deposit required which now hovers aroung 20% and yesterday it was anounced that UK house prices saw the biggest drop 2.5 percent in March, for the last 15 years.
You can have a read of my new hub page covering the subject of the credit crunch from a UK perspective here;
http://hubpages.com/hub/subprime-explained
As I say- Really good article so thanks for your view on the subject.
Regards
Liz
Greg - great post - wish the worst was behind us - it's amazing how deep and wide the problem is.
First posting!
I appreciate hearing the truth on this matter-even though it is really unsettling.
Couldn't help but think of some biblical passages while reading.
"There is nothing new under the sun (king solomon)"
"....For the LOVE of money is the root of all evil"
"the borrower is servant to the lender"
Lastly, maybe with new leadership (maybe), we can start to chase the "moneychangers out of the temple"!
Thanks Greg
Very good information to understand our current happening on financial markets, which directly effect our every day life. I wonder, how long it is going to last?
Very good hub! The rich wanted to get richer while not taking into account what the final outcome may be. If they would have thought about the consequences of their actions in the first place then things might have been different. Lax business practices have made it difficult for the upstanding, very well quailfied person, to make a good deal now. That is a shame. While we are all suffering from what started 20 years ago. I personally don't see an end to this.
Hi Greg,
An excellent explanation.
Unfortunately, the subprime saga is not the end of it.
People have been maxing out credit cards in an effort to keep their heads above the financial tide, and due to the current financial situaiton they are increasingly unable to pay back these debts.
The backlash from this will also be huge.
Meanwhile, banks are being lent even more money at lower and lower interest rates - but too much cheap credit is what caused this mess in the first place.
But the bankers and clever finances who put together these dodgy financial instruments have made their money - while the Government tries to pick up the pieces with - you guesses it - public money.
Probably one ofthe biggest cases of "Privatise the profits - Socialise the losses" that the world has ever seen.
Here in Australia, the rumblings of the US subprime fiasco are certainly being felt.
The whole world is in for a rough ride.
Regards,Eric G.
I will NEVER take a Subprime Mortgage no matter what!
Scary situation isn't it. So many will be wiped out and a lot of the culprits are setting themselves to make a fortune. More money was made in the last depression than ever before for those who knew what to do.
Paper money not backed always leads to disaster. Nixon leaving the gold standard was the beginning of all this in 1971.
What no one has mentioned is that there is an insurance policy one can take out to protect yourselves in the way of precious metals. Only 4% of people hold them. On my hub about gold and silver you can see a video featuring Robert Kiyosaki. Family and friends I have asked to watch this have said "oh my god"! People just do not know.
For those who cannot afford big investments of gold and silver there are options eg: my hub or www.silversnowball.com/37
I have been passionate about this for years and I want to shout it to the world. It is just so wrong that people are being ripped off and deceived.
You see the recent news about AMEX cutting back customers credit limits in response to the credit crunch and subprime mortgage issues? Seems like everything is getting completely out of hand.
Nice hub, very informative summary on the Subprime Mortgage Crisis.
I am an Australian mortgage broker, and I can certainly tell you that the US credit crisis is having a huge impact on Australia. We have has several mid sized mortgage companies close down, as well one very large bank (Macquarie Bank - they own Sydney Airport) pull out of the residential mortgage market altogether.
Greg - very nice article - few people know that Sweden went through a similar crisis in early 1980's and had to take over bad debt - primary cause at that time was devalued collateral which is what we face now. Hard to understand why Fannie and Freddie did not devise a method for rating loans when placing lower rated loans in a mortgage backed security. I understand that the issue of complex derivatives being added to the mix is a whole new problem but moving forward I can't help believe that there can't be a MBS that is made up of good quality single family mortgages. When any market is in a bubble there seems to be little concern for ongoing risk assessment and accurate risk ratings. Wall Street - The Administations of 2 Presidents - Congress and The Mortgage Lending Industry all let us down - Regards - David
Greg!...You are a prophet!! I was searching the net for a few days sporadically though, looking for an article that explains "CDOs" in simple terms. I tripped over this one....
All of your predictions turned out to be true....Well done and thank you. Now I will share it with my friends!
Nice hub good information about how bad is the subprime mortgage crisis. And there is news about mortgage crisis that its cutting back customers credit limits.
I have been reading about this for 7 years now. Yes, Bretton Wood and then 1971 closing of gold window are key events. Libereterians have been very right in their assessment of the situation and they haveen been saying this for many years now. This 540 trillion however, needs an explanation. The total debt of financial sector and the consumer adds to about 28 trillion dollars. This includes MBS and other debts. If you add to this the debt of private sector and governments it totals over 50 trillion. These are US numbers. I don't understand how the derivatives can add up to multiple times more than the debt amount they are based on. If so, this means close to a million dollar per household in the industrial world. How can this be? Our total debt obligations thru mortgage etc are a fraction of this. I suspect there is multiple counting of the same debt here. For instance a bank loans to another bank which loans to another bank etc. That way, the same amount of obligation is counted multiple times. This is misleading. Otherwise, the whole world is bankrupt financially, which does not make mathematical sense.
k3,
I am afraid that the entire world is bankrupt. You are correct in that point. The derivatives problem has since grown to be near 1,000 trillion. that is multiple times the entire income of the entire world. There is no solution. these bailouts are just a band-aid on a terminal cancer. The band-aid will not cure the patient.
We are at the point where the system will fail within a few months and a new financial system will have to be created. There is no other way out of this financial mess.
Great information Greg;
I was listening to a telephone interview between R. Kyosaki and M. Dillard a few days ago that touched on many similar points. Definitely eye-openers and a call to action for anyone paying attention.
Thanks for sharing .....
I'm sorry but everyone is to blame for the mess that our economy is in. Folks were quick to jump into houses without reading the fine print of that mortgage loan. In 2001 while I was living in California I was in the market for a new home and the lender I was working with had me pre-approved for $600,000 but kept pounding into my head how low my mortgage would be and what a great investment I would be making. Mind you I was going in with 0% down. I read the fine print and the loan he was talking about was a ARM! In my mind I was only wanting a $400,000 home to fit my income. Even the realtor I was working with kept pushing the more expensive homes on me. I looked at these two like they were crazy! I was working a fairly decent paying job but being the financial astute individual that I'm I couldn't go through with such a purchase. Even when I questioned them both on the stability of an ARM they said the market may soften a tiny bit but it would never crash.
Well, looking at the current state affairs I do believe the market has crashed and I hope those two con-artists enjoyed the ride off the pain of people who didn't have the knowledge or sense of mind to realize what they have gotten themselves into.
Now I own my own home in Florida and let me tell you.....it took us two years to make it a reality. We did our research on lenders and realtors. Followed the interest rates religiously everyday. And the most important thing...made sure our wallets could handle the mortgage payment and the bills that come along with being a homeowner.
I think it will take a very long time for the market to rebound from this mess. its not going to be a walk in the park. Blaming Wall Street is not going to solve the problem....its here and we all have to play a part in turning things around.
Regardless of the motives, the market is still ripe for purchasing houses in the US. Whenever fear grips the herd, you know a butcher is abouts!
The crisis is just as bad here in South Africa, although, we never did sub prime mortgages, the effect of the US crises hit us hard - I still think we were spared to a great extent by our "low" interest rates of 10.5%!
IWantMoney 4 years ago
Very interesting information!