Someone explain to me how the Housing Boom caused the Banking Crisis

[nomoreneveragain]

I opened up my parents Mortgage statement, I saw out of the minimum payment roughly:

1/3 of it goes to Principal, 1/3 goes to the Interest (more like 1/4) and the other 1/3 goes Insurance & taxes.

If you add Principle + Interest Paid in about 2-3 years what Money the bank loaned off would be given back to them & the bank would be getting another 15-20 years worth of payments from my folks.

It would have taken an absurd number of people not paying their Mortgages (close to 70%) for these banks to go under. Factor in that it was people living shytholes in Michigan, Ohio, Florida etc who made up a good portion of the people who didn't pay/foreclosed. The equivalent of the size of those mortgages is 1/10th in comparison to a in a bigger metropolis like L.A or NYC.

 

[humble forever]

Subprime loans were a very flawed product. People who have jobs that don't pay much took/ were given these mortgages and the rates were adjustable. The mortgages they took were already at the limit of their ability to pay off. Once payments increased, they were totally fukked. Once the recession hit and they lost their jobs, they were fukked. Then the banks and investors who had held these products they created realized shyt was hitting the fan and panicked once they realized was no one to pass them off to/ the product was not going to provide a return- actually create a loss. Basically a bunch of money that was assumed to show up eventually didn't. A bunch, a whole lot. A fukkin shytload. Money that didn't exist truely ceased to exist when the man came calling for it.


Im only a sophomore in finance but thats kind of the best i can explain it



I think they shouldn't have been so quick to foreclose on homes, and tried being patient. Im sure the people wanted to keep their house, and in time, maybe longer than the investors and banks had initially hoped,they could get their money back.

 

[blackzeus]

No foreclosures in Vegas? LA? Anyway, it's simple:

Hedge funds looking to make a buck

Retirement funds/pension funds/institutional funds/government funds (e.g. AIG) looking for a return

American real estate has never lost money, over 7 year period has always gone up, safe bet right?

Hedge funds starting backing non-Main St lenders with credit lines to fund untraditional mortgages, and also acts as a buyer to Main St banks for untraditional mortgages (normally all mortgages were sold to Fannie Mae)

Hedge funds buys the mortgages from said lenders, and sells at a markup to the aformentioned pension/institutional/etc funds looking for a return

The money is good, everybody gets greedy

Loans get crazier, to the point you don't even need a job to get financed, people start being unable to pay

Hedge funds cash out and say bye bye to non-Main St lenders, Main St lenders, and aforementioned institutional funds, leaving everybody else holding the bag

I think you can finish the story from this point forward.

 

[wheywhey]

The big banks weren't really in any crisis. The mortgages that they had made were packaged into securities and sold to unsuspecting suckers. Only the small banks that actually kept mortgages or were barely hanging on for other reasons failed. The big banks were forced to take the money as a smoke screen. The big banks paid back their bail out money immediately because they didn't need it in the first place.

The insurance industry was in crisis. Mainly AIG. It was one of the suckers that bought the mortgage securities. They also insured derivatives against default and didn't purchase reinsurance as a hedge. They needed the bailout to pay claims and to prevent panic. They are an annuity company so people's retirement money was in jeopardy.

Warren Buffet owns GEICO and he was immediately in favor of the bailout because he knew AIG was about to fall and maybe take him down too. I can't remember what his relationship with NBC was back then, but he had some connection. He talked to them, or CNBC, and the network was pro-bailout after that.

Nov 4, 2013 10:00 PM MT

Morgan Stanley (MS), the sixth-largest U.S. bank by assets, said it may be sued by American International Group Inc. (AIG) over mortgage-backed securities that the insurer purchased before the financial crisis.

AIG bought $3.7 billion in mortgage pass-through certificates that were sponsored or underwritten by Morgan Stanley in 2005 through 2007, the New York-based investment bank said yesterday in a regulatory filing. AIG terminated an agreement that had given it more time to bring claims, and the pact will end Nov. 7, according to the filing.

AIG, which repaid a government bailout last year, sued Bank of America Corp. (BAC) in August 2011 over $10 billion in losses on mortgage-bond investments, saying it was the victim of a “massive fraud.” Morgan Stanley has set aside $549 million for litigation in the first nine months this year, up from $381 million in the same period last year.

“The company expects future litigation accruals in general to continue to be elevated,” Morgan Stanley said in the filing. “Changes in accruals from period to period may fluctuate significantly given the current environment regarding financial crisis-related government investigations and private litigation affecting global financial services firms, including the company.”

AIG was bailed out by taxpayers in 2008 after the New York-based insurer was overwhelmed by losses on property bets. Matt Gallagher, a spokesman for AIG, declined to comment. Charlotte, North Carolina-based Bank of America has disputed the insurer’s claims.

Morgan Stanley helped advise the U.S. government on its rescue of AIG and was one of top underwriters as the U.S. divested its majority stake through public offerings. It also helped AIG dispose of a stake in reinsurer Transatlantic Holdings Inc.
http://www.bloomberg.com/news/2013-...aig-may-sue-over-mortgage-investments-1-.html

 

[L&HH]

It would have taken an absurd number of people not paying their Mortgages (close to 70%) for these banks to go under.

Didn't you sort of answer your own question. Idk if it was 70% but it was alot. And I think your assessment that it was mainly Florida, Ohio, and Michigan that took a brunt of the hit might be flawed. One of my aunts was able to get a major steal on a house here in maryland right after the crisis [anecdote, yes I know but I doubt it was just those 3 states that were really hurting]

 

[wheywhey]

Didn't you sort of answer your own question. Idk if it was 70% but it was alot. And I think your assessment that it was mainly Florida, Ohio, and Michigan that took a brunt of the hit might be flawed. One of my aunts was able to get a major steal on a house here in maryland right after the crisis [anecdote, yes I know but I doubt it was just those 3 states that were really hurting]

Arizona, Nevada, and California.

 

[Kritic]

i can't say everything cause my woman's info is all over the internet now. but she went from making 40k a month for 10+ years to being [damn near] homeless with nothing to her name from 08-2010 .


michigan state.

 

[Ethnic Vagina Finder]

Greed. People abusing credit.

 

[Jatt]

Another big factor was the banks packaging these shytty mortgage into risky CDOs (Mortgage Backed Securities), which were rated as safe. On top of that, almost everyone (banks, Insurance funds, Hedgefunds, tax payers) had massive bets on house prices continuing to go up.

Lack of foresight and regulation led to Contagion in the shadow banking system.

 

[tmonster]

just watch this

 

[Ohene]

securitization for sale to third parties

 

[Domingo Halliburton]

some of those MBS's only took like 6-8% of the mortgages to default for them to be completely worthless

 

[blackzeus]

some of those MBS's only took like 6-8% of the mortgages to default for them to be completely worthless

Talk about house of cards

 

[L&HH]

just watch this

that "fukked up" part is hilarious. A guy like me would have feasted back then though

 

[tmonster]

that "fukked up" part is hilarious. A guy like me would have feasted back then though

it's pure comedy gold