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.

Housing Bubble: (maybe?) bad for tax revnues, pollution, and employment

My friend Jenny asks how housing markets impact other aspects of other society. I have been reluctant to way into discussion of the housing crisis situation, since I don’t know a lot about it. But here are a few random thoughts.

First, as Jenny points out in her request local taxes and sometimes state taxes are tied to housing prices. Since taxes are usually put on the value of the house, if house prices go down so does revenue. This article in the Sacramento Bee, suggests that in California where only local areas collect property taxes the decline in the housing market will hurt revenues.


What other avenues are there? This is purely theoretical, but one problem with the current housing market is that people might be less willing to move if they have to sell their home at a loss. At the same time gas prices are going up. The increase in gas prices, which seems to be more permanent than temporary should encourage people to move closer to their jobs, but this may be prevented if people cannot sell their home. So the credit crunch could be increasing pollution if it prevents response to gas prices.

More importantly as Tim Harford, the undercover economist, explains in a slate article, home ownership can lead to more unemployment. He makes this assment based on an

"An English economist Andrew Oswald has shown that across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment.”

In short the theory goes, people with houses can’t move to where the jobs are as easly. Similarly I would assume that people who can’t afford to sell their house, can’t move to where the good jobs are.. possibly increasing the recession.

I don’t know enough to say if a bailout is a good idea or not, but there are some possible other fallout from the housing market.