Originally Posted by
limitles
Sub prime mortgate lending was a direct tool used for the profit of few. And as it turns out it was the ruin of many, not the few. Answer that in your own words
There were way too much assets floating around the world. Including your pension fund. It needed to earn “interest”.
Money managers were desperate for returns.
Read rich speculators needed gas for the boat
This cool new toy satisfied the need for returns AND provided credit for homeowners. Home ownership is a fundamental value in the US and is promoted by all. I won’t get into why people owning a home is a good thing.
No harm is caused. It’s all good.
EXCEPT. Financial institutions measured their assets (the mortgage backed securities) on a
risk weighted basis.
"Our rules, they said, state we can only accept so much risk."
Let's see if we can get around those rules
But looking back we see that defaults are occurring at a far smaller rate than we had figured. You know what? We can accept more risk. So on and so on.
People don’t default when asset prices (your house) is rising in value.
Maybe you get a second mortgage or refinance. People endlessly refinanced their rate. They could get refinanced cause their house was worth more.
The vast majority of these sub-prime loans came with a nifty feature called adjustable rate
A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets
Don’t drink too much and don’t accept too much credit. The public bought shit they never should have. Mortgage brokers were sleazy salesmen. Bartenders keep serving.
The public were stupid. They trusted salespeople.
The financial institutions were stupid because their analysis of their asset’s risk was backward looking & flawed. They accepted too much risk and consequently were too steeply leveraged.
If there was regulation the regulators weren’t gonna say shit cause their future employer was that financial institution. (Just like your Congressman.but I digress).
Regulations are not to be handled by those to be regulated
When asset prices fell cause every breathing US citizen had already bought a home - the whole house of cards collapsed.
There were many other wonderful details but this is how I remember that episode.
TOO MUCH CREDIT AND IT GOT DELEVERAGED.
there is always a new twist in every cycle There is always something new.
I know Limitles is just making conversation but I wanted to see if I could riff the housing crisis