The Collapse of world Economy
What started the Sub-Prime Crisis?Banks lent money to those who could hardly afford to service the loan. What a JOKE 😂
It's the early 2000's and investors are looking for new safe sources of return stocks and bonds are still pretty popular but the tech bubble at the turn of the century showed them that getting your money back from bankrupt firms can be a bit difficult but and also the interest rates during early 2000's were as low as 1%. So the question for an investor is where to invest? In 2001 US government was motivating the home buyers to buy houses at the same time real estate prices were on the rise. In the early-to-mid 2000s, interest rates on house payments were actually quite low so it created a room for homebuyers and investors for putting their money.
The Subprime mortgage crisis occurred when the real estate market collapsed and homeowners defaulted on their loans. What does Subprime mortgage mean then? Subprime mortgages are named for the borrowers that the mortgages are given to. If the prime rate for a mortgage is what is offered to people with good credit and a history of dependability, subprime is for those who have struggled to meet those standards. People who are approved of subprime mortgages historically have low credit scores and problems with debt repayment. Subprime borrowers are those who have poor credit histories and are therefore more likely to default. Lenders charge higher interest rates to provide more return for the greater risk. So, that makes it too expensive for many subprime borrowers to make monthly payments. These borrowers knew nothing about the terms of there loan terms as the terms says about the interest to be charged on the basis of adjustable interest rate which means interest rates during initial years will be low but increase in later periods.
This sudden increase in subprime mortgages was due in part to the Federal Reserve's decision to significantly lower the Federal funds rate to spur growth. People who couldn't afford homes or get approved for loans were suddenly qualifying for subprime loans and choosing to buy, and American home ownership rose exponentially. Real estate purchases rose not only for subprime borrowers, but for well-off Americans as well. As prices rose and people expected a continuation of that, investors who got burned by the dot com bubble of the early 2000s and needed a replacement in their portfolio started investing in real estate.
Housing prices were rising rapidly, and the number of subprime mortgages given out was rising even more. By 2005, some began to fear that this was a housing bubble. From 2004-2006, the Federal Reserve raised the interest rate over a dozen times in an attempt to slow this down and avoid serious inflation. By the end of 2004, the interest rate was 2%; by mid-2006 it was 5.25%.
The subprime mortgage crisis, which guided us into the Great Recession, has many parties that can share blame for it. For one, lenders were selling these as mortgage-backed securities. After the lenders approved and gave out the loan, that loan would be sold to an investment bank. The investment bank would then bundle this mortgage (CDO's) with other similar mortgage for other parties to invest in a, and the lender would, as a result of the sale, have more money to use for home loans. The bundle of mortgage was called CDO (collateralized debt obligation). CDOs, or collateralized debt obligations, are financial tools that banks use to repackage individual loans into a product sold to investors on the secondary market. Investment banks made sure that these CDO's are rated through credit rating agencies (although rating was never revised even when defaults rates were on the rise) CDO's were mostly AAA rated with almost zero default risk. The real problem with CDOs was that buyers did not know how to price them. One reason was they were so complicated and so new. Another was that the stock market was booming. Everyone was under so much pressure to make money that they often bought these products based on nothing more than word of mouth.
Banks and hedge funds made so much money selling mortgage-backed securities, they soon created a huge demand for the underlying mortgages. That's what caused mortgage lenders to continually lower rates and standards for new borrowers. Mortgage-backed securities allow lenders to bundle loans into a package and resell them. In the days of conventional loans, this allowed banks to have more funds to lend. With the advent of interest-only loans, this also transferred the risk of the lender defaulting when interest rates reset. As long as the housing market continued to rise, the risk was small. The advent of interest-only loans combined with mortgage-backed securities created another problem. They added so much liquidity in the market that it created a housing boom.
Home prices fell tremendously as the housing bubble completely burst. This crushed many recent homeowners, who were seeing interest rates on their mortgage rise rapidly as the value of the home deteriorated. Unable to pay their mortgage on a monthly payment and unable to sell the home without taking a massive loss, many had no choice. The banks foreclosed on their houses. Homeowners were left in ruins, and many suburbs turned into ghost towns. Even homeowners with good credit who qualified for standard mortgages struggled with the steadily rising interest rates. By the time these homes were foreclosed upon, they had cratered in value. That meant banks were also taking massive losses on real estate. Investors got hit hard as well, as the value of the mortgage-backed securities they were investing in tumbled.
Investment banks who bought and sold these loans that were being defaulted on started failing. Lenders no longer had the money to continue giving them out. By 2008, the economy was in complete freefall.
Some institutions (AIG INSURANCE which provided CDS facilities on these CDO) got bailout by the government. Other banks, who had gotten so involved in the mortgage business, were not so lucky. Many of the purchasers of CDOs were banks. As defaults started to mount, banks were unable to sell these CDOs, and so had less money to lend. Those who had funds did not want to lend to banks that might default. By the end of 2007, the Fed had to step in as a lender of last resort. The crisis had come full circle. Instead of lending too freely, banks lent too little, causing the housing market to decline further.
Lehman Brothers was one of the largest investment banks in the world for years. It was also one of the first investment banks to get very involved with investing in mortgages, something that would pay off until it became their downfall. The plummeting price of real estate and the widespread defaulting on mortgages crushed Lehman Brothers. They were forced to close their subprime lenders, and despite their many attempts to stop the bleeding (such as issuing stock) they continued to take on losses until, on Sept. 15, 2008, Lehman Brothers applied for bankruptcy. Lehman Brothers was one of the most prominent financial-service firms in the world. Its rapid descent into bankruptcy was a major cause of the 2008 stock market crash.
The ultimate cause of the subprime mortgage crisis boils down to human greed and failed wisdom. Banks lent, even to those who couldn’t afford loans. People borrowed to buy houses even if they couldn’t really afford them. Investors bought crap they didn't even knew what was there in those CDO'S and invested blindly.
When the dust settled from the Collapse, 5 trillion dollars in pension money, real estate value,saving and bonds had disappeared.
8 million people lost their jobs, 6 million lost their homes and that was just in the USA.
It's the early 2000's and investors are looking for new safe sources of return stocks and bonds are still pretty popular but the tech bubble at the turn of the century showed them that getting your money back from bankrupt firms can be a bit difficult but and also the interest rates during early 2000's were as low as 1%. So the question for an investor is where to invest? In 2001 US government was motivating the home buyers to buy houses at the same time real estate prices were on the rise. In the early-to-mid 2000s, interest rates on house payments were actually quite low so it created a room for homebuyers and investors for putting their money.
The Subprime mortgage crisis occurred when the real estate market collapsed and homeowners defaulted on their loans. What does Subprime mortgage mean then? Subprime mortgages are named for the borrowers that the mortgages are given to. If the prime rate for a mortgage is what is offered to people with good credit and a history of dependability, subprime is for those who have struggled to meet those standards. People who are approved of subprime mortgages historically have low credit scores and problems with debt repayment. Subprime borrowers are those who have poor credit histories and are therefore more likely to default. Lenders charge higher interest rates to provide more return for the greater risk. So, that makes it too expensive for many subprime borrowers to make monthly payments. These borrowers knew nothing about the terms of there loan terms as the terms says about the interest to be charged on the basis of adjustable interest rate which means interest rates during initial years will be low but increase in later periods.
This sudden increase in subprime mortgages was due in part to the Federal Reserve's decision to significantly lower the Federal funds rate to spur growth. People who couldn't afford homes or get approved for loans were suddenly qualifying for subprime loans and choosing to buy, and American home ownership rose exponentially. Real estate purchases rose not only for subprime borrowers, but for well-off Americans as well. As prices rose and people expected a continuation of that, investors who got burned by the dot com bubble of the early 2000s and needed a replacement in their portfolio started investing in real estate.
Housing prices were rising rapidly, and the number of subprime mortgages given out was rising even more. By 2005, some began to fear that this was a housing bubble. From 2004-2006, the Federal Reserve raised the interest rate over a dozen times in an attempt to slow this down and avoid serious inflation. By the end of 2004, the interest rate was 2%; by mid-2006 it was 5.25%.
The subprime mortgage crisis, which guided us into the Great Recession, has many parties that can share blame for it. For one, lenders were selling these as mortgage-backed securities. After the lenders approved and gave out the loan, that loan would be sold to an investment bank. The investment bank would then bundle this mortgage (CDO's) with other similar mortgage for other parties to invest in a, and the lender would, as a result of the sale, have more money to use for home loans. The bundle of mortgage was called CDO (collateralized debt obligation). CDOs, or collateralized debt obligations, are financial tools that banks use to repackage individual loans into a product sold to investors on the secondary market. Investment banks made sure that these CDO's are rated through credit rating agencies (although rating was never revised even when defaults rates were on the rise) CDO's were mostly AAA rated with almost zero default risk. The real problem with CDOs was that buyers did not know how to price them. One reason was they were so complicated and so new. Another was that the stock market was booming. Everyone was under so much pressure to make money that they often bought these products based on nothing more than word of mouth.
Banks and hedge funds made so much money selling mortgage-backed securities, they soon created a huge demand for the underlying mortgages. That's what caused mortgage lenders to continually lower rates and standards for new borrowers. Mortgage-backed securities allow lenders to bundle loans into a package and resell them. In the days of conventional loans, this allowed banks to have more funds to lend. With the advent of interest-only loans, this also transferred the risk of the lender defaulting when interest rates reset. As long as the housing market continued to rise, the risk was small. The advent of interest-only loans combined with mortgage-backed securities created another problem. They added so much liquidity in the market that it created a housing boom.
Home prices fell tremendously as the housing bubble completely burst. This crushed many recent homeowners, who were seeing interest rates on their mortgage rise rapidly as the value of the home deteriorated. Unable to pay their mortgage on a monthly payment and unable to sell the home without taking a massive loss, many had no choice. The banks foreclosed on their houses. Homeowners were left in ruins, and many suburbs turned into ghost towns. Even homeowners with good credit who qualified for standard mortgages struggled with the steadily rising interest rates. By the time these homes were foreclosed upon, they had cratered in value. That meant banks were also taking massive losses on real estate. Investors got hit hard as well, as the value of the mortgage-backed securities they were investing in tumbled.
Investment banks who bought and sold these loans that were being defaulted on started failing. Lenders no longer had the money to continue giving them out. By 2008, the economy was in complete freefall.
Some institutions (AIG INSURANCE which provided CDS facilities on these CDO) got bailout by the government. Other banks, who had gotten so involved in the mortgage business, were not so lucky. Many of the purchasers of CDOs were banks. As defaults started to mount, banks were unable to sell these CDOs, and so had less money to lend. Those who had funds did not want to lend to banks that might default. By the end of 2007, the Fed had to step in as a lender of last resort. The crisis had come full circle. Instead of lending too freely, banks lent too little, causing the housing market to decline further.
Lehman Brothers was one of the largest investment banks in the world for years. It was also one of the first investment banks to get very involved with investing in mortgages, something that would pay off until it became their downfall. The plummeting price of real estate and the widespread defaulting on mortgages crushed Lehman Brothers. They were forced to close their subprime lenders, and despite their many attempts to stop the bleeding (such as issuing stock) they continued to take on losses until, on Sept. 15, 2008, Lehman Brothers applied for bankruptcy. Lehman Brothers was one of the most prominent financial-service firms in the world. Its rapid descent into bankruptcy was a major cause of the 2008 stock market crash.
The ultimate cause of the subprime mortgage crisis boils down to human greed and failed wisdom. Banks lent, even to those who couldn’t afford loans. People borrowed to buy houses even if they couldn’t really afford them. Investors bought crap they didn't even knew what was there in those CDO'S and invested blindly.
When the dust settled from the Collapse, 5 trillion dollars in pension money, real estate value,saving and bonds had disappeared.
8 million people lost their jobs, 6 million lost their homes and that was just in the USA.
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