is the subprime mortgage really the cause

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Was watching Anderson Cooper when they asked what
percent of homes are in foreclosure, they said 2 %

they asked this question because Obama said we have all
been living beyond our means, well not 98% of American mortgage
holders

just to verify the 2% statistic found this
US home foreclosures rise by 75 percent in 2007

how can 2% foreclosures cause such a supposed huge
financial crisis, even if it was 5%, guess we need to find out
how much money is in that 2%, even still there is a lot of money
in the 98% that are making their payments

more must be going on then they are telling us
  • Profile picture of the author Kay King
    I'd call that a catalyst - the cause is much wider and deeper. We built a financial house of cards and removing one card (sub-prime) is taking down the house.

    From therealdeal.com sept 2008

    In the second quarter, 9.16 percent of mortgages nationwide on homes in the one-bedroom to four-bedroom range were at least a month late in payment or in some stage of foreclosure, according to a report from the Mortgage Bankers Association. This is up from 6.52 percent from the prior year, and represents the highest percentage of overdue loans since the MBA began tracking the statistic 39 years ago. The rate of mortgages already in the foreclosure process was 2.75 percent, up from 1.40 percent a year earlier. Around 30 percent of subprime loans were overdue in the second quarter, while 5.35 percent of prime loans were.
    If you look at numbers from 2006,2007 and 2008 - the trend upward shows up clearly.
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  • Profile picture of the author derekwong28
    Foreclosure is the last step but there is a much higher percentage of people who are behind mortgage payments that may or may not lead to foreclosure. I agree what has happened is absurd.

    "It all started with the rising defaults in the housing market. My limited understanding of this sad telenovela is: the spiral begins with eager homebuyers going to their favorite retail banks that entice them with low, low rates of interest (so that even a buyer who should logically be able to afford only a $100,000 loan borrows $300,000) since the bank turns around and bundles these mortgages into securities and guaranteed by their famous Fannie Mae and Freddie Mac, which securities (mortgage-backed securities or MBS) were sold to Wall Street (such as Lehman Brothers), which were repackaged with collateral debt obligations (CDOs) or collateral debt swaps that were insured (among which, AIG), and sold to institutional investors that included pension and retirement funds, hedge funds (Bear Stearns). Eventually, the housing bubble bursts as home buyers begin to default on their mortgages. The next step down is when the Wall Street institutions can't pay off the MBS which they used as collateral to leverage their own increased debt. Note that CDOs do not have any real assets behind them -- what we call "ampao." One more step down: banks, faced with mounting debt and shrinking assets, freeze credit to the detriment of production and business. Investors in the stock markets flee, and everyone is trapped in a dreadful downward spiral. Clearly, that would result in a financial sector collapse of huge proportions"


    So basically, you had a highly leveraged system that is not designed to take any downside risk in house prices or the economy. The main reason why so many of these complicated bonds and derivatives have been drawn up is that bankers can make a quick profit through them. Therefore the whole crisis really arose through the greed of bankers. Many countries incluing mine have experienced house price drops of more than 50% and yet our financial system remained intact. The main reason was that everybody realized there was a bubble and a 30% downpayment was requried for property purchases. Also of course, the mortgages are not repackaged as bonds and so we did not have extra layers of leverage.

    That is why for the long term, I am still very concerned about the situation. After the events of the past months, it would be extremely surprising if house prices do not fall even much further. Therefore the amoung of money involved will grow much larger.

    Derek
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  • Profile picture of the author espacecadet
    Banned
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  • Profile picture of the author toppito
    Government is the cause of the problem and especially the Fed's loose monetary policy.

    Don't expect the problem to go away anytime soon
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  • Profile picture of the author Andres
    There is no one cause - the mortgage melt down is a major factor but so is the war in Iraq and the trade deficit we have with China.

    We keep spending $$$$ in Iraq and we have nothing to show for it and the trade deficit with China doesn't help.

    These are the 3 major factors that have led us to this point in time.
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  • Profile picture of the author derekwong28
    The Iraq war was definitely a big cofactor, but there were others as well. One was very high oil and commodity prices, which was again driven by speculators.

    Remember in the 2nd quarter, most economists were optimistic that the worse was over. That was until oil prices started rising relentlessly.

    -Derek
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    • Profile picture of the author HeySal
      Read it:
      700 Billion Bailout » Top Secret Money Lab

      I know the author in this blog. He doesn't post crap and has every authority to know the difference. Once you read that - read the rest of the blog entries. If that doesn't tell you everything you need to know about the world financial climate, then you just aren't ready to know.
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      Sal
      When the Roads and Paths end, learn to guide yourself through the wilderness
      Beyond the Path

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      • Profile picture of the author John Henderson
        In mid-February of 2008, a documentary in the "Dispatches" series was broadcast on the UK's Channel 4 called "How the banks bet your money". It was hosted by a British venture capitalist called Jon Moulton, and he was absolutely scathing about the role that politicians, regulators and bankers played in the sub-prime loans fiasco.

        The really striking part about it though, is the accuracy of the predictions that he makes about what (in February) was just around the corner....

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        • Profile picture of the author Kay King
          Quick profit and the quest for more and more profit destroyed the mortgage industry.

          When lenders kept their mortgages in house, defaults were low because they were cautious of who they lent money to. As they began selling off mortgages to various larger financial institutions, they eased requirements a bit but still most loans were "good".

          But when loans became "paper" to sell, resell, and package in with securities to sell again - there was no incentive to look as closely at buyers. Mortgage brokers earn their money when the mortgage is approved and closed - the lenders could sell off the mortgage right at the closing table and it could be sold off again almost immediately. If you don't have to deal with the results of your poor loan qualifying procedure, why worry about it? That was the thought for a long time - and we had a government that encouraged home ownership for all - and a citizenry who thought it was their right to buy what they wanted.

          kay
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