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Full Version: The Subprime Mortgage Crisis and the Bailout
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Suijen
All right, I'm have a pretty weak economics background but I'm hoping someone here will add to/correct what I think is happening.

First, an inflow of foreign capital to American banks means that banks have more capital, so they want to make more money by loaning that money out.

They decide to give a lot more "subprime mortgages", which are mortgages that are below market value. Basically, they give unusually cheap loans for homeowners who aren't qualified for regular loans. The banks did this because they have that influx of capital.

Then, homeowners start buying up houses like nothing because of all these easy loans. This demand drives up the cost of houses such that...for some reason, these homeowners can't pay up the interest rates for the houses they borrowed and thus default on their loans, saying they can't and won't pay up.

The banks thus lose so much money that they're bankrupt, and so the current crisis we have right now is a bailout package to these banks since they lost so much money from so many defaulting homeowners.

And the $700 billion dollar package is to make sure that the banks have the money for the people who put the money into the banks.
ltk
Due to the lower home price right now, a lot of those homeowners actually dump their homes and declare bankruptcy to default the loans so they can go back and buy a home at a cheaper price for like $300 K instead of the loan that they have to pay for a $600 K home that they bought like 3 years ago .

Of course, when they declare bankruptcy to default on a loan and they want to buy back a home at a cheaper price, the home that they'll buy will be under the names other than themselves, let's say a trusted family member like their kids instead icon_twisted.gif
punjabtrini
The loan issuers were going "hog wild" on issuing paper when the main criterion were ignored i.e. having a job, not enough tme in job, no job, not enough credit score/rating, so when people began to default, everything just fell through the roof.
Plus you had layoffs, cheap labour, and the economy could not absorb the 'crashes' at the consumer level.

Issuers were just lax or ignored the qualifying rules and regulation for loans/mortgages.
avisitor
QUOTE(Suijen @ Sep 29 2008, 10:20 PM) [snapback]3943286[/snapback]
All right, I'm have a pretty weak economics background but I'm hoping someone here will add to/correct what I think is happening.

First, an inflow of foreign capital to American banks means that banks have more capital, so they want to make more money by loaning that money out.

They decide to give a lot more "subprime mortgages", which are mortgages that are below market value. Basically, they give unusually cheap loans for homeowners who aren't qualified for regular loans. The banks did this because they have that influx of capital.

Then, homeowners start buying up houses like nothing because of all these easy loans. This demand drives up the cost of houses such that...for some reason, these homeowners can't pay up the interest rates for the houses they borrowed and thus default on their loans, saying they can't and won't pay up.

The banks thus lose so much money that they're bankrupt, and so the current crisis we have right now is a bailout package to these banks since they lost so much money from so many defaulting homeowners.

And the $700 billion dollar package is to make sure that the banks have the money for the people who put the money into the banks.

I'm no expert. But, this is how I see it ...

It started when the Feds moved the prime rate lower to stimulate the economy.
Then, the housing market heated up. People could afford to buy houses with cheap loans.
Next, the price of the houses went up because there was more buyers.
This made the people who bought houses earlier look like they have more equity in their homes.
Which in turn made them look like better risks. The Sub-prime mortages looked better and better as
an investment. The houses were worth more ... prices kept increasing.
Lenders saw it was easier to get back their money in case of defaults.
It looked like a safe bet. And so, began a campaign to lend more.

Unfortunately, the prime rate went up. The housing market cooled.
The borrowers couldn't pay the new monthly mortage payments (Adjustable Rate Mortages).
And began defaulting on the loans.
All of a sudden the lenders couldn't get the money back because the value of the houses diminished.
Crunch, ... some of the investors were big banks and financial institutions.
These investors were neck deep in their bets on the sub-prime mortages.
As the fall continued, these investors went bust. Failed.

Now, was it irresponsibility? Or, a mad rush for what looked like gold?
Who ends up hurt and who pays for it? US ...
you and me and all our children to come will end up paying for this mess.
One way or another, we will end up paying. thumbsdown.gif
Dim_Sum_4_U
People turned crap into gold pretty much. Loans were given to people who weren't qualified because everyone thought money grew on trees. Then when it came time to pay, alot of people got screwed cause they couldn't afford it. Everyone is to blame for this. The Democrats for pushing banks to loan to more people and the Republicans for believing that everyone should own a house, and stupid people who borrow more than they can afford.
deadfish
It affects many in such a large scale because:

The American govt forced the banks to lend out sub-prime loans for housing. They even penalise those banks that did not lend out enough. Fannie Mae and Freddie Mac are regulator of the policy and the credits that the bank gave out.

This made the banks give out housing loan to every tom d!ck and harry, without proper screening. (Subprime loan)

These many numbers of small-loans are packed into larger bonds. These bonds are then sold and resell among each other in the banking arena. Imagine the package to have an actual value of $50,priced at $60, sold at value of $75, then resold again at $85.

Many investors(like you and me) bought investments into bonds such as these at (example) the price of $85, but we wouldn't know the actual value is only $50.

On the other end, more people are getting the loan that were given out by the banks. Houses becomes 'hot' commodity thus rising in price. Imagine a $30 house priced at $60 because of the demand. As such, many of these subprime loan borrower defaulted on their repayment. They would imagine that they could still profit because the prices of houses went up right? But the fact is that there are not many buyers left.

So, in the end, the people lost their houses due to default in payment, the banks hold onto many pumped up, unsold houses, the small-time investors who bought the bonds lost their 'investments'.

Perhaps the key is that, "where did the money go? who earned from all these $hit?". Well for 1, the house developers during the early days. The boom made them quite some money. But these are not the main beneficiary. The intermediate traders for the bonds in the early stage earned a lot too.

Assumption and complacency kills.
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