Mortgage Backed Securities Summary

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

In 2008, the American economy broke down. Known as the Global Financial Crisis, this is widely considered to be the worst financial crisis since the 1930’s when the stock market crashed and the Great Depression hit.

For many years, the idea that ones’ home being the largest investment was said as a complete sentence when in fact, it was only an incomplete sentence. Any duly licensed financial planner would finish that sentence by saying all investments are subject to market conditions, the value that investment could increase or decrease and other similar cautionary statements that their attorneys wrote to protect them. The American public only heard that their home was the largest investment and had never experienced, nor had their parents seen the value of their personal homes drop like they did in the past few years. They had never experienced the financial pain and although only a few years have passed, many have forgotten and are ready to jump right back into homeownership.

It isn’t like this hasn’t happened before. In 1907 US I banks went bankrupt, Wall Street was cleaned up and subsequently the US became the 20th Century King of the Jungle. In 1966 almost all the financial companies went bankrupt in Japan, the Japanese then cleaned up the system and Japan became the world’s best growth economy for the next 20 years! In 1990s the Japanese propped up banks and, they did not let their banks fail, this led to the creation of zombie banks and major problems for Japan which still haunts it. The same happened in the 1970’s in the US and this was a lost decade for the US with high inflation rates and troubles galore. Even, the dot com burst, all this happened but the world did not end! When capitalism goes awry you can’t bring in socialism all of a sudden, bankruptcies teach the capitalists to respect the markets and accept their failures with humility. So, this current performance is just desperation as the US doesn’t have any bullets left after shooting in the dark.

The responsibilities of the mortgage brokers to the borrowers, lenders, and investors were to promote the subprime mortgages to these groups of people in order for them to take out a loan. Although they did fulfill their responsibilities of promoting and having people sign up for it, they mishandled on how people should be granted for a mortgage loan. These brokers were to desperate about earning huge amount of money due to the expanding market that they ignored the proper precaution that they should have taken when they

The financial crisis from2007 to 2008 is considered the worst financial crisis since the Great Depression of the 1920s and destroyed the U.S. economy severely. It led the housing prices fell 31.8%, the unemployment rate rose a peak of 10% in the United States. Especially the subprime market, began defaulting on their mortgage. Housing industry had collapsed. This crisis was not an accident, it caused by varies of factors. The unregulated securitization system, the US government deregulation, poor monetary policies, the irresponsibility of 3 rating agencies, the massed shadow banking system and so on. From my view, the unregulated private label mortgages securitization is the main contribute factor which led the global financial crisis in 2008.

For many years America was the lone superpower in the world after the collapse of the USSR in the 1990’s. During this same decade, America saw the internet revolution and a surplus in the budget for the first time in a long time. This meant that the economy was surging, and a lot of internet companies saw their stocks rising rapidly and their shareholders also sharing in the profits. This all came to a quick end in the 1990’s with the “dot.com” bubble popping resulting in a downturn at the end of the decade. This compiled with the events of 9/11 a few short years later created a large amount of instability throughout the economy of the country, with this uncertainty looming it only took a few more years for the housing market to collapse due to oversaturation of the housing market. Then finally in October of 2008, the auto industry took a nose dive along with a banking crisis shortly

In the lead up to the current recession, when the real estate market began to fall, there were so many investors shorting stocks and securitized mortgage packages that were already falling, that the market simply fell further. There were no buyers at the bottom, and the professional investors made millions off of the losses of others. Beyond this, there was no real federal regulation for securitized mortgages, since there was no real way to gauge the mathematical risk of any given package. This allowed the investors to take advantage of the system and to short loans on real people’s homes. Once these securities were worthless, many of the homebuyer’s defaulted on their mortgages and were left penniless. No matter from which angle this crisis is looked at, the blame rests squarely with the managers who began the entire cycle, the ones who pursued the securitization of mortgages. Their incompetence not only led to the losses of Americans who have never invested in the stock market, but to losses for their shareholders.

Here is a little certainty for the homeowner: 95% of every single home loan are securitized. So what does that intend to the homeowner?

For many years, the idea that ones’ home being the largest investment was said as a complete sentence when in fact, it was only an incomplete sentence. Any duly licensed financial planner would finish that sentence by saying all investments are subject to market conditions, the value that investment could increase or decrease and other similar cautionary statements that their attorneys wrote to protect them. The American public only heard that their home was the largest investment and had never experienced, nor had their parents seen the value of their personal homes drop like they did in the past few years. They had never experienced the financial pain and although only a few years have passed, many have forgotten and are ready to

Throughout the 90 's and the turn of the century, the housing market has stood as an economic pillar, supporting growth and prosperity and assisting generations in upward momentum from the lower to middle class. This is why the 2008 housing market crash had such a debilitating effect on the economy. The crash left millions facing foreclosure and millions more underwater. The burst of the housing bubble even effected international markets, causing havoc in other countries. These misguided policies were the main source of the financial turbulence that flattened the U.S. economy.

At the time of a home purchase, it is very common to take out a mortgage. A mortgage is a loan offered by a bank or lending agency to finance the purchase. The loan requires monthly payments on the principal plus interest. Within the mortgage industry this is only the beginning.

“In the United States, foreclosures were up 81% in 2008 and up 225% from 206”, which equals out to 19 per 1,000 households (CBS News, 2008). Due to there was a huge increase in foreclosures, instead of housing prices increasing; the houses values decreased in value very quickly and resulted in more foreclosures. A $300 thousand dollar mortgages was now only worth $75 thousand dollars. So all the mortgages that was in the investment banker CDO, now are worthless, and no one wants’ to take the CDO, and now the CDO is acting like a bomb (Roney, 2007). The investment banker is now panicking because he borrowed millions of dollars to buy the mortgage, and now he cannot get rid of it; however he is not the only one. Thousands of investment bankers throughout the world have CDO’s on their hand (Bailed out banks, 2010). In result the world’s financial system has become frozen, and everyone starts going bankrupt. As a result of the failure, the United States government rolls out a new program called Troubled Asset Relief Program (TARP) to prevent another bank failure.

Due to such events as the subprime mortgage crisis, the auto market and Wall Street’s failure, the United States suffered a severe economic blow. Looking at the situation from an economic view, supply is supposed to equal demand. Due to the mortgage crisis and the careless attempts of some to make money, there is a superfluous amount of empty homes throughout the United States. In the subprime mortgage crisis, the nature of the failure was the inability to account for money given to individuals, who lack the appropriate requirements. In order to obtain a loan, collateral is needed. References were not being checked and poor credit history went ignored. People were obtaining loans and not paying attention to the interests rates associated. “This time around, the slack standards allowed millions of high-risk borrowers to get easy home mortgages. When this so-called subprime market collapsed beginning about a year ago, ordinary working people bore the brunt” (Gallagher, 2008). Companies were so anxious to place people in homes, that it cost them billions of dollars and

Mortgage holders with inadequate sources of regular income could borrow against their rising home equity. The agencies that rank securities according to their safety (which are paid by the issuers of those securities, not by the buyers) generally rated mortgage-backed securities relatively safe—they were not. When the housing bubble burst, more and more mortgage holders defaulted on their loans. At the end of September, about 3% of home loans were in the foreclosure process, an increase of 76% in just a year. Another 7% of homeowners with a mortgage were at least one month past due on their payments, up from 5.6% a year earlier. By 2008 the mild slump in housing prices that had begun in 2006 had become a free fall in some places. What ensued was a crisis in confidence: a classic case of what happens in a market economy when the players—from giant companies to individual investors—do not trust one another or the institutions that they have