re: What Happen with the Sub-Prime Mortgage Crisis

Someone told me people making 50k a year were getting $550,000 mortgages. That’s insane.

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It was due to the fact that foreign investors see American real estate as something that always goes up. In order to feed the global investment beast, brokers let had to keep pushing the limits by creating the risky securities. It eventually crashed.

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This.

The demand by foreign investors for mortgage backed securities fed the monster.

It was a demand for bulk/quantity. Not quality.

People want to play politics with the issue. But if it wasn't for foreign investment, there wouldn't have been the easy money to lend.

The other side of the story is the economic collapse. It doesn't matter what your credit rating was... being unemployed for 18 months makes repaying most any loan difficult. Being underemployed times 2 (2 household incomes both earning less) makes repaying any loan difficult. Freddie. Fannie. Subprime. FHA. It didn't matter. All of the paper was shot with the unemployment/underemployment.

You add in the fraud, speculative investment, and lack of documented equity, and it was an awful lot of borrowers finding it easier to walk away than pay back their promises.

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Watching a Documentary and seems to blame Bush. I thought it was mainly Clinton.

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There was lots of blame to go around.

The roots of it start with Carter's Community Reinvestment Act, a part of it was George HW Bush tying bonuses or Fannie/Freddie chiefs to how many sub-primes they had underwritten, Bill Clinton helped it grow by leveraging allowing banks to expand against how many sub-prime loans they made.

One of the first things GWB did when he got into office was to try to slow down the growth of sub-primes. The Dems in Congress had a field day calling him a racist.

9/11 happened and in order to keep the economy from crashing Bush urged the Fed to lower interest rates. This was fricking Miracle Grow as more people than ever began trying to take advantage of low rates. With the market so hot, the new and relatively untouched market of sub-prime home loans became a hot commodity. Eventually GWB even glommed onto it as a way to say the economy was surviving.

Somewhere along the way some Wall Street arse-monkey decided to bundle these sub-prime mortgages into securities. As people paid their mortgages, payments on these securities would come in. The problem is that so many of these loans were made in very shady fashion (because FM/FM was underwriting them so lenders weren't so worried about defaults) so once the balloon payments hit and people making $35k/yr began to understand the simple math of how they couldn't afford a $275k home, they realize their own recourse was to just bail on the home.



TL;dr - there's no one culprit. Most of the building blocks were done with good intentions but were done without thinking about the cumulative effect (nor even really seeing the connections until it was all hindsight).

Answer is simple:
Keysenian economics.

Ron Mother fricking Paul

Dude nailed this in 2003

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bay from the bank I worked for at the time.

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What bank?

You do know that most of the loans were not originated by banks. Right?

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Watching a Documentary and seems to blame Bush. I thought it was mainly Clinton.

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It was everyone who wanted to make a buck, government or not. To their credit, Republicans tried to question Democrats about Freddie and Fannie in 2004, but they shut it down. Video is on C-SPAN.

Predatory borrowing, predatory lending. FI's found ways to make securities look sexier than they were.

It was a disaster that was a decade or so in the making that goes across the aisle to both parties.

The three books that explain it best, IMO, are The Housing Boom and Bust by Thomas Sowell, Roger Lowenstein's The End of Wall Street, and Michael Lewis' The Big Short (the book, not the movie). The three of those combined paint a pretty good picture.

For extra credit, you could go back and read When Genius Failed: The Rise and Fall of Long Term Capital Management. Back in '98 when the bond markets nearly collapsed. People tried to make things too complicated.

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Watching a Documentary

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Not much of a documentary if it is placing responsibility with Bush. It was all on Leahy, Frank and the Clinton administration.

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What bank?

You do know that most of the loans were not originated by banks. Right?

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Small bank in Tulsa, total of 3 locations.

We luckily were not obligated to keep records of the loans brokers tried to get us to buy. Almost daily at least 1 independent broker or another would stop in at the height of the mess trying to sell us sub prime loans or sometimes portfolios even. Didn't take long for us to just shake our heads "no" as we saw them walk in the door.

I later worked for one of the largest holding companies in the world going through over a thousand loan files a month to be sure all the documentation was present and properly executed, etc., before selling to Fannie/Freddie. That's all I did 5 days a week was move files from one box to another speed reading loan docs.

Loan quality was on a steady downward trend for a long time. There's a rather large segment of people in America that are just not suitable for lending to, much less mortgage lending. But under Bawny Fwank the criteria basically boiled down to 2 criteria: Are the applicants breathing? Do they have a pulse?

Once banks were able to package and sell mortgages rather than have to handle losses on their books it was all over. The Fed nd Wall Street were the enablers.