Wednesday, May 14, 2008

Mortgage Crisis Explained, This American Life Puts it all in Prospective

I have to admit I still did not quite understand how the mortgage crisis happened. It was really put into perspective last night when I listened to this week’s episode of This American Life, a public radio program. I really recommend listening to the whole thing (here). It’s an hour long but great!

To summarize. Within the last few years the amount of money around the world that is invested has double with a lot of it coming from exporting countries like China and oil producers. These countries were looking for decent but reasonably safe returns. US treasury bonds were not paying much, so someone figured out that people could buy up packages of mortgages. Sure some would default, but with enough of them the risk should even out. Soon the good packages of traditional mortgages were purchased, so the rules for mortgages changes. Instead of showing your tax return, to show you could pay your loan, you could just state your income and assets without verification, then mortgage brokers stopped asking for that. Not surprisingly if you don’t verify people’s income or don’t even ask you get a worse pool of borrowers.

Additionally, mortgage brokers lied to sell more loans, like one man whose paper work said he made almost 6 times more a year then he actually did. This is a classic economics problem if you offer a loan or insurance you are more likely to get the people who can’t repay or will need to use the insurance.

The other problem was computer models underestimated the amount of people under the non-income verifying that would default. The underlying problems now are that international investors are afraid of a variety investment. Also that as these mortgages were resold now thousands of people own each mortgage, since they were sliced up, so there is no way to renegotiate things.

So be prepared to show your tax returns and pay stubs to buy a house.



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7 comments:

david said...

And so they should be! I don't understand how the US has a mortgage crisis,its one of the richest countries in the world if not the richest. Why don't more people have insurance or even Mortgage Bonds this would have helped the situation wouldn't it?

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