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.
It wasn't just the number of people who couldn't pay their mortgages. It was the people who got approved for mortgages who shouldn't have gotten approved AND the amount of mortgage they were approved for.
So, banks decreased their minimum limits on who got approved. Not really that bad. It's the American dream. But, the banks also offered these applicants a pretty high amount of mortgage. Enough to make them go bankrupt in two to three years. Most people don't necessarily max out on their credit limit when it comes to buying a house. For example, you can afford a $700/month mortgage, but you could be approved for a mortgage that costs $1400/month. That's double. And that's what people did. If a lot of these people just got a mortgage that was within their limit, this situation would not have occurred. But the housing bubble increased home prices, and people were willing to pay more since they got approved for more. It wasn't just low income people either. People got into the "flipping" craze and started buying a second property to flip. These are middle class people who had the funds to get a second mortgage. No problem, right? The bubble burst. All these middle class people got stuck with a second mortgage, that's doubling their expenses and for a property that they aren't living in or are generating income on.
The risky ones maxed out on the second mortgage, because home prices had doubled and so that was the thinking behind that. You get a $200,000 second mortgage, you might be able to flip it for $400,000. You get a $300,000 mortgage and you might be able to flip it for $600,000.
Then, when the price of the second property was worth less than what they bought it for, they either ate the loss in selling it for less, ended up going bankrupt, or rented it out. This was happening in more states, than just Michigan, Ohio and Florida.
