Posted tagged ‘mbs’

Understanding the Subprime Mortgage Crisis

September 21, 2008

Our economy is in deep shit and like it or not – you’re sitting smack dab in the middle it.  Lots of people are asking the same questions:  “How the hell did we end up like this?”,   “Isn’t this just a Wall Street problem?” and “could this recession really effect me? – If so, how bad could things get?”    To fully understand why the U.S. economy is in such bad shape and getting worse, one of the things you need to do, is get a firm grip on understanding the Subprime Mortgage Crisis…

The prudent man’s rule when calculating how much one can afford to pay for a home without getting in over your head is typically no more than 3-4x your annual income. 

In 2005 (the peak of the United States housing bubble) the economy was booming, jobs were plentiful, consumers were spending and the real estate market was unstoppable. However, irresponsibly unnoticed the median home price had become six to nine times greater than median income.  That was the sign banks chose to ignore.  Despite this dislocation, lenders were tripping over themselves to make loans based on the unrealistic misconstrued concept that property values would always continue to soar.

Competition became so fierce among lenders they began seducing the unfortunates, people with bad debt, low paying jobs and sketchy credit histories.  Based on their less than adequate financials, this subprime underclass that had no business even buying property, had become mortgagors.  Both the lender and the buyer knew they couldn’t really afford that dream home – but what the hell, those (more…)