The Mortgage Mess Explained Simply

[Mr. Sandman]

I have not listened to it yet but I will... but the one thing I don't understand, I have read in several places...while the amount of mortgage failures is large, the percentage of "bad" mortgages compared to the total is not. It is something like 10% of the mortgages which are bad, many of which could be restructured and only about small % are really bad. I don't understand how something less than 10% of the bad mortgages can cause this total collapse of these huge banks.
Also,they write off these as worthless...which they are not. There is a house that is worth something, it is not zero. It may be 20-50% less than a few years ago but it is not zero.

[spence]

Originally Posted by Mr. Sandman

I don't understand how something less than 10% of the bad mortgages can cause this total collapse of these huge banks.
Also,they write off these as worthless...which they are not. There is a house that is worth something, it is not zero. It may be 20-50% less than a few years ago but it is not zero.

The issue is that as the loans were lumped together and sold off in a bundle, they don't really know where the risk specifically is.

The government plan looked like it meant to buy blocks of risky loans to take the liability off of the lenders and sort it out themselves.

-spence

[Mr. Sandman]

Yeah, I understand the intent of the rescue package but I don't understand how when 90+% of the loans are sound how it could get to the point where you loose big banks like this. IMO this is largely psychological...probably a "vast left-wing conspiracy" to gain votes somehow
Honestly though, I hope this ship can be righted and sail on. It is very unnerving to watch play out... I am trying to concentrate on important things, like fishing.

[spence]

Originally Posted by Mr. Sandman

Yeah, I understand the intent of the rescue package but I don't understand how when 90+% of the loans are sound how it could get to the point where you loose big banks like this.

Well, it looks like the ones who were holding a large % of the riskier loans are getting hit the hardest. People were looking for new investments, and the credit default swap allowed for investments into securities that wouldn't normally be attractive.

Additionally the scheme gave companies false confidence that they didn't need to protect themselves from a large percentage of defaults.

So the economy slows down, foreclosures skyrocket, and the lenders don't have the resources to pay the bills for those holding the liability on the loan. It's like any business, at the end of the day you either need to have a black balance sheet or credit to get a loan. Lacking either and you can't keep the lights on.

At least, that's how I think it happened.

-spence

[striperman36]

Sounds about right to me.
I still don't think a 'shoot from the hip' bailout is the best way to go, glad to see some step back and think about it.

[spence]

Originally Posted by striperman36

Sounds about right to me.
I still don't think a 'shoot from the hip' bailout is the best way to go, glad to see some step back and think about it.

The risk of course is that investors, who need confidence, just were reminded that our government is inept. My fear is that we could spiral down quickly further and make solving the problem more difficult.

McCain sure looked stupid claiming a personal victory before it was all said and done. But my real anger is toward the House Republicans. The fact that they would submarine the bill because Pelosi made a silly partisan comment is absolutely pathetic. She also needs to get control of her own side of the House.

-spence

[Nebe]

Originally Posted by spence

At least, that's how I think it happened.

-spence

Something else to consider is that the higher reevaluations in the housing market was a windfall tax income for just about every town in America and helped shore up major budget shortfalls across the nation. That being said, it was in everyone's interest to see house prices go up- the home owner felt rich and the towns were taking in more property tax.

I feel like someone just pushed the reset button......

[rwilhelm]

Originally Posted by Nebe

Something else to consider is that the higher reevaluations in the housing market was a windfall tax income for just about every town in America and helped shore up major budget shortfalls across the nation. That being said, it was in everyone's interest to see house prices go up- the home owner felt rich and the towns were taking in more property tax.

I feel like someone just pushed the reset button......

Yeah I remember in 2005 when my house was reevaluated and I my taxes took a big jump up. This year they just did the reevaluations and my assessment stayed the same. This is what sucks because there is no way I could get what my house is assessed for in today's market. But of course towns and cities will never lower your assessment! The only people the housing crisis helps right now is first time buyers. If your are a first time buyer you can get a great deal.

[fishpoopoo]

the repeal of glass steagall is irrelevent.

the types of instruments that initially got us into trouble were $2 trillion of sub-prime mortgages underwritten from 2002-2007. that's the countrywides, indymacs, and wamus that didn't have investment banking operations to speak of.

this is all a symptom of the money supply being ballooned by that idiot greenspan.

take a look at this chart. from 1987 to present, greenspan and his protege bernanke more than quadrupled one measure of the money supply, while at the same time, the economy (not pictured) only doubled.



this constant increase in the money supply - which was intended to lower interest rates, encouraged investment banks like bear stearns and lehman and insurance companies like AIG (neither of which had any commercial or home lending operations) to assume huge amounts of leverage - loans and derivatives contracts that were 30-60x a firm's capital. because the fed gave them a false sense of security by keeping rates low. if the fed had not meddled, you would have seen a natural deleveraging process (slow down loans and derivatives contracts) occur.

because leverage only works for you when the market is going up. on the way down, it bites you in the arse.

all this talk about regulation is really moot. the real culprit is the federal reserve.