How did we get here?
Where did all of this reckless mortgage lending behavior come from? What started us down the path of loaning money to those who were previously unloanable (is that a word)?
During the dot.com bailout, in 2001, the Fed lowered key interest rates to historic lows. This was an attempt to revive the economy that had been destroyed by the dot.com run up.
Homeowners, armed with historically low mortgage rates, began purchasing properties as if they were playing monopoly. Prices of real estate soared. Investors bought larger, more expensive properties with little money down. In 2005, 7.1 M properties were bought in the US. 40% of them were non-owner-occupied!!!
Wall Street investment banks bundled risky mortgages, packaged them into bonds, and sold them to banks and investors. Bond-rating agencies gave these investments high ratings.
But the subprime borrowers began defaulting on their loans -- some because their adjustable rate mortgages adjusted upward, some because they simply were "bad pay" from the beginning.
Like a house of cards, these defaulting borrowers created a series of events that sent housing prices downward. Banks and brokerages that had borrowed money to boost the impact of those investments had to race to raise capital.
Some, like Merrill Lynch, were forced to sell. Others, like Lehman Brothers, weren't so lucky. "These firms closed their eyes and made very bad bets on risky securities that they didn't truly understand," says Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton business school. "Investments that they did not have to make led to their demise."
More on this soon...
During the dot.com bailout, in 2001, the Fed lowered key interest rates to historic lows. This was an attempt to revive the economy that had been destroyed by the dot.com run up.
Homeowners, armed with historically low mortgage rates, began purchasing properties as if they were playing monopoly. Prices of real estate soared. Investors bought larger, more expensive properties with little money down. In 2005, 7.1 M properties were bought in the US. 40% of them were non-owner-occupied!!!
Wall Street investment banks bundled risky mortgages, packaged them into bonds, and sold them to banks and investors. Bond-rating agencies gave these investments high ratings.
But the subprime borrowers began defaulting on their loans -- some because their adjustable rate mortgages adjusted upward, some because they simply were "bad pay" from the beginning.
Like a house of cards, these defaulting borrowers created a series of events that sent housing prices downward. Banks and brokerages that had borrowed money to boost the impact of those investments had to race to raise capital.
Some, like Merrill Lynch, were forced to sell. Others, like Lehman Brothers, weren't so lucky. "These firms closed their eyes and made very bad bets on risky securities that they didn't truly understand," says Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton business school. "Investments that they did not have to make led to their demise."
posted by Russell T. Nolting at
6:58 AM
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