I’m not sure how these packages were marketed to the final investor, but obviously the sub-prime, or otherwise risky, mixture was too rich

Basically, there is a huge trade in credit default swaps, which is more or less insurance against a debt (bond, mortgage, what have you) not being paid. A lot of people sold this insurance; in 2006, for example, it cost $14,000 dollars to insure a $10 million debt portfolio. However, most of these sellers didn’t really have deep enough pockets to pay if conditions turned bad. AIG was a major seller of this type of insurance, which is why they went under.
Here is one article describing the problem. The Wikipedia entry on credit default swaps is also very good, although quite technical.

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So the sub-prime piece is the tumor which is killing the patient.

That’s what I thought I understood. I just wanted to make sure.

Then, when you add on all of the other exotics, adjustable rates, etc. you get a big steaming plate of bailout.

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Just to add, Aye Chi, not all mortgages are subprimes. So you can’t look at the 11.2% as the percentage of *all* mortgage loans.

However I did find a site with some dated info (April of this year), but will give you an idea of the rise of subprime mortgage activity, and it’s packaging into the MBS (mortgage backed securities) resale market. Remember that it was Jan 1, 1995, that the CRA compliance regulations were rewritten to demand numberical proof of compliance for minority/low-income lending.

Percentage of all mortgages bundled into securities,
1994: 55.8 percent;
2007: 74.2 percent

Percentage of all subprime mortgages packaged into securities,
1994: 31.6 percent;
2007: 92.8 percent

Percentage of mortgage originations that were subprime,
1994: 4.5 percent;
2006: 20.1 percent.

Increase in face value of subprime mortgages issued between 1994 and 2006: 1,700 percent

There’s some more interesting generalizations there as well. But it was a perfect storm of a mess, coming together. i.e. below…

Household debt as a percentage of disposable income, 1985: 74.9 percent; 2006: 137 percent

Also below… note that the conventional mortgages only had a 2% default rate, while the subprimes had an average of 13.7%

Foreclosure rate on prime mortgages issued between January 1999 and July 2007: 2 percent; on subprime mortgages: 13.7 percent

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Aye Chi, the last stats I saw was back in Feb of this year, where it was about 11.2% of the 2007 subprime (only, not conventional) mortgages. That was double the amount of 2006 loans that went south. This, of course, doesn’t include student loans as well. Just mortgage.

About 40% of the subprime loans made in 2006-07 were made on what they called low doc/no doc or stated income loans. The low doc/no docs required either no proof of income or tax returns, or just the minimum. They went primarily on credit scores, and the appraisal value of the property.

It was an era of many exotic loan packaging by lenders. To avoid mortgage insurance, they would package 1st and 2nd loans… the first being an 80% LTV of the home, and a 2nd with the 20% value. Or sometimes they do what they call an 80/15/5 (80% 1st, 15% 2nd, and 5% downpayment) The mortgage insurance adds a lot to a monthly payment. Conventional loan MI rates are considerably higher than FHA MI. VA has no mortgage insurance.

These loan packages are part of the response to the CRA compliance mandates. When risky borrowers could not meet standard lending requirements, they created new loan packages that would ask for only minimal criteria.

Interest only loans were also another option… where you never paid down on the principle, but only paid the interest on the loan balance. This means you had to have home price appreciation in order to not be upside down in a mortgage, since you’d be responsible for the full loan price if you resold.

Some of these loans had appropriate value for short term ownership. Interest only for house flippers who purchased, fixed up, and then resold on the market. The 80/20 or 80/15/5 packages were good for those that wanted to buy into a new home, and were selling another home in a good resale market. They took their proceeds from the original sale, and paid of the 2nd, leaving them with an 80% mortgage and no MI.

It’s not a blanket “bad thing” depending on each buyers’ circumstances. However the subprime, combined with the astronomical rise in housing prices was the death knell.

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What is the default rate on the sub-prime mortgage species?

I found an article from April 2008 which shows a nationwide rate of 8.5% with individual states such as FL, WI, and OH showing rates near 13%.

Then you have to have to factor in adjustable rate defaults that as well since those rates have adjusted upward multiple times now so as to become unmanageable for the borrower.

I’m not sure how these packages were marketed to the final investor, but obviously the sub-prime, or otherwise risky, mixture was too rich and threw the overall balance out of whack.

There was an article I read recently about people who were able to go in and get a mortgage without any proof of income, without a SSN, and even without any ID.

I cannot even write a check without ID.

How in the hell can someone buy a HOUSE without an ID?

I will try and find it.

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Actually, Yon, I understand what Lee was trying to say.

This has nothing to do with sub-prime mortgage holders (who are defaulting at 5%)…

He was talking about the homeowner/borrowher here, not the secondary mortgage market holders (investors, Fannie/Freddie, Wall Street etc) Yes, absolutely many of those took out mortgages, buying more house than they could afford. Then again, there was that mandate of proving X amount of easy money mortgages. And the prices escalated so astromically since 1997.

and everything to do with the super human greed exhibited by Wall St brokers.”

Here’s were I might disagree with Lee somewhat. If you had the CRA compliance banks making hand over fist on subprimes, where is it fair to say the private institutions shouldn’t get on the same bandwagon? Fact is, the easy money was wrong for both CRA and private institutions. Then again, there were those mandates.

Which brings us full circle to this being a Congressional mishap of unforgivable magnitude.

Then Lee said:

It was funny money when it was issued and it’s beyond a joke now.

The same people who told us last year, and earlier this year, that this was all small potatoes, are now predicting the end of the universe. We shouldn’t have believed them then, and to believe them now?!

Can’t agree more.

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Aye Chihuahua focuses in and ups the magnification.

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More than greed it’s the ultimate fruition of the “Nanny State” mentality.

These low enders who should have been red lined when they applied for their mortgages instead ended up benefiting once again from the gov’t teat.

The Dims accomplished their goal of power retention by a “Give ya, give ya” approach to politics.

This is the perfect example of what happens when you apply political correctness to capitalism and the free market.

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FOCUS, LEE MAJELLA, FOCUS

“This has nothing to do with sub-prime mortgage holders (who are defaulting at 5%) and everything to do with the super human greed exhibited by Wall St brokers.”

It’s primarily the “super-human greed exhibited by” Democrat congress people. Stop trying to shift focus away from the real culprits, Carter and Clinton and their cronies.

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This has nothing to do with sub-prime mortgage holders (who are defaulting at 5%) and everything to do with the super human greed exhibited by Wall St brokers. If this isn’t classic fraud, somehow telling investors in those repackaged ‘securities’ they were getting were investment grade AAA sh**, i don’t know what is.

That the banks are now not lending to each other shows us how much lying has been going on with this system, banks know this, they’re all in on and have profited handsomely from this b.s.

The piles of almost worthless bond and other paper that Paulson wants to re-inflate using our tax money needs to be nuked instead of trying to nurse this crap back to health. It was funny money when it was issued and it’s beyond a joke now.

The same people who told us last year, and earlier this year, that this was all small potatoes, are now predicting the end of the universe. We shouldn’t have believed them then, and to believe them now?!

Fool me once…

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