A Simple Explanation of the Subprime Crisis Part 1 - Page 2

10-01-2008, 07:21 AM

Hi David! I was quite impressed with the explaination, thanks a lot. My question is that does the current crisis have deeper implecations? Real estate or land used to be really cheap if not free, in the olden days. Its has increased in value without any real change, other than the buildings or fixtures on it. The real crisis could be seen as the difference in original value form the current value of the asset or property which the loan was made for. Now you have loans made for the gap which in reality is just a principle, economics. Hope I make sense.

I think this would be very much the same as the internet bubble that burst a few years ago. We had all this internet guys who were worth millions or even billions of dollars, value wise but not with money. Some of them were rich without having the actual cash to back this value. Problem arose when this guys got to sell their companies for what they were worth which eventually people realized that they paid for something that was not really there, just future values of the company. When the buyer would cash in his investment, nothing was there to cash in. Did I just confuse things?

10-01-2008, 11:02 PM

Hi David

Thanks for your simple lectures. They've really helped me understand how the subprime crisis originated. I'm situated in Australia and I've been trying to find good articles on the effects of the subprime loan crisis on Australia's financial markets and macroeconomy but everything is just hazy.

Would you have any ideas on the effects that the subprime crisis have had on Australia?

David Waring · 10-02-2008, 02:58 PM

Hi,

Glad to hear from you.

Australia is in somewhat of a unique position as it has been growing faster than the rest of the world over the last several years which is one of the reasons why interest rates are high there relative to the rest of the world.

This gives the economy there a bit more flexability as they guage how much of an effect the global slowdown has for them, as they have much more flexibility to lower interest rates to combat falling growth.

The main areas where Australia will most likely be hurt are in the export sector and while they do not have anywhere near the exposure to subprime that many other places due, the fact that the global credit markets are locking up is still going to hurt the financials.

This could potentially spill over into the broad economy there as well which is something that policy makers and traders with exposure to Australia are watching closely.

Hope that helps.

Best Regards,
Dave

10-06-2008, 01:01 AM

I see what you are saying with your explanation, but I don't think it goes deep enough. What's more it puts seems to point the blame in the wrong direction, but everything you say is true, but the deeper history of Fannie Mae and Freddie Mac not being discussed, the reason for their creation and the oversite they have had from the original owners, the federal government, don't do Greenspan, Bush and the sitting party alot of justice. Greenspan did lower interest rates, there is no question of that. And it was to keep us from a recession, no different than Carters secretary of the treasury Bill Miller raising interest rates to create a recession, in Carters eyes, to prevent a depression. All that being said, the history of it.

Fannie Mae was a created by and run by the federal government in 1938 to replenish the money available for home loans. They were there to 'buy' mortgages from banks and to make FHA loans for homes. In 68 Lyndon Johnson made Fannie Mae a mostly private company and authorized it to buy conventional loans. Then in 1970 the fed created Freddie Mac for basically the same purpose, and to end the monopoly in that business. Both were private but the feds still had alot of oversite. Up to this point things are good.
Then in 1981, they begin purchasing ARM mortgages, the beginning of the end. Then in 1998, Fannie Mae announces the national availability of Flexible 97, a new mortgage product designed to expand home ownership through a low three percent down-payment requirement. This is when the gambling starts, the requirements for loans are really loosened and the housing market responds from all the easy money. All the while, banks are trying to keep up and needing to conform with these lower standards to continue to make loans. The amount of money available to people to buy houses skyrockets and the housing boom is in full swing. Developers actually begin making loans themselves with 2 year notes and final balloon payments for the full selling price of the homes they are selling, and not even collecting a monthly payment that would pay the interest on the principal of a loan for the value of the house. Meanwhile, houses are selling at an unheard of rate, which artificially inflates the value of the homes being sold. The developers are making money hand over fist, selling the loans off as fast as they are made. All the while, folks that could have never afforded the homes they are living in are fat dumb and happy, for about 24 months.

Then reality sat in.
The balloon payments came due, which of course required a loan to pay, and the banks looked at these people and laughed, they were never qualified, nor did they have any ability to make the payment on a house of that value. The banks were not going to loan the money and the foreclosures began. This was the true pin that started the bubble bursting. Now, as the 2 year mortgages were coming due of the balloon, and the required payment of lets say $250,000 was due, a second problem was created, now in addition to the folks that couldn't afford theirs houses were being foreclosed on, the people that could afford the loans also began being forclosed on because the house they paid $250,000 for is only worth $189,000 so that is what the bank will loan. Banks are not in business of making loans on things for more than what they are worth, they tend to loose money that way. So even qualified buyers are now loosing their homes due to not being able to get a loan to pay the balloon payment.

So, who's to blame? There were buyers that had no business getting loans they couldn't pay back, but there were also fully qualified buyers, that chose a cheaper loan for other reasons that were also part of this, so it's partly the buyer.
The developers/builders? They were writing the paper that created alot of this, so can we point the blame at them? Again, yes and no. They were writing mortgages that someone else was buying up, if there were no mortgage buyers, there would be no loans written by the developers. They are not in the mortgage business, they just build homes, as cheaply and quickly as possible.
So is it the bank down the street that was making the loans< not really, they needed to compete. The saying is "When in Rome" I believe.
So we get back to Mac,, and Mae. They created the ARMS and all the other odd ball low interest loans, but the real question is why.

Personal opinion goes clear back to 74 to the Fair Housing Act, and more specifically the manner in which it was twisted to allow these loans in the first place.

David Waring · 10-06-2008, 11:55 AM

Glad to hear from you.

Yes when I put this series of videos out about a year ago Fannie and Freddie had not failed yet so there was no where near the amount of information out there about the role that they played as there is now.

From reviewing this information it does seem that they played a much larger role than it was initially reported so thank you for adding the details here.

Best Regards,
Dave

10-08-2008, 12:34 AM

hey mate how ya goen,

i was just wondering how you think this crisis impacted on the Australian financial market?

10-08-2008, 03:13 AM

Quote:

Originally Posted by Unregistered

hey mate how ya goen,

i was just wondering how you think this crisis impacted on the Australian financial market?

Do you want David to write your ECON1102 essay for you?

David Waring · 10-08-2008, 04:03 PM

Quote:

Originally Posted by Unregistered

hey mate how ya goen,

i was just wondering how you think this crisis impacted on the Australian financial market?

Hi There,

Below is a post where I discuss how this affects the Australian financial markets. Have a look at that and if there are any specific questions let me know:

http://www.informedtrades.com/2699-s...tml#post135480

Best Regards,
Dave

oprice · 01-07-2009, 01:51 PM

If I am a bank and I shifted the risk by selling the mortgages to a third party, why am I not isolated from the crsis? What do I care about the failed payments?

David Waring · 01-07-2009, 03:19 PM

Quote:

Originally Posted by oprice

If I am a bank and I shifted the risk by selling the mortgages to a third party, why am I not isolated from the crsis? What do I care about the failed payments?

If you sold off all the mortgages then you are insulated from the crisis in the sense that you are not going to take losses directly because of the price of these mortgages falling. Indirectly however you are affected because you business, which is originating loans, has now probably fallen dramatically because all the people who were buying the loans that you were making are now bankrupt.

Let me know if that does not make sense or if you have any other questions.

Best Regards,
Dave

10-01-2008, 07:21 AM	#11 (permalink)
Unregistered Badges About Assets Posts: n/a InformedPoints: 0 [Points Log]	Deeper into the Crisis Hi David! I was quite impressed with the explaination, thanks a lot. My question is that does the current crisis have deeper implecations? Real estate or land used to be really cheap if not free, in the olden days. Its has increased in value without any real change, other than the buildings or fixtures on it. The real crisis could be seen as the difference in original value form the current value of the asset or property which the loan was made for. Now you have loans made for the gap which in reality is just a principle, economics. Hope I make sense. I think this would be very much the same as the internet bubble that burst a few years ago. We had all this internet guys who were worth millions or even billions of dollars, value wise but not with money. Some of them were rich without having the actual cash to back this value. Problem arose when this guys got to sell their companies for what they were worth which eventually people realized that they paid for something that was not really there, just future values of the company. When the buyer would cash in his investment, nothing was there to cash in. Did I just confuse things? Share This \|

10-01-2008, 11:02 PM	#12 (permalink)
Unregistered Badges About Assets Posts: n/a InformedPoints: 0 [Points Log]	Impact on Australia Hi David Thanks for your simple lectures. They've really helped me understand how the subprime crisis originated. I'm situated in Australia and I've been trying to find good articles on the effects of the subprime loan crisis on Australia's financial markets and macroeconomy but everything is just hazy. Would you have any ideas on the effects that the subprime crisis have had on Australia?

10-02-2008, 02:58 PM	#13 (permalink)
David Waring InformedTrades Founder Community Host Badges About Assets Total Awards: 4 Join Date: Nov 2007 Location: Miami, FL Posts: 5,632 InformedPoints: 0.13	Hi, Glad to hear from you. Australia is in somewhat of a unique position as it has been growing faster than the rest of the world over the last several years which is one of the reasons why interest rates are high there relative to the rest of the world. This gives the economy there a bit more flexability as they guage how much of an effect the global slowdown has for them, as they have much more flexibility to lower interest rates to combat falling growth. The main areas where Australia will most likely be hurt are in the export sector and while they do not have anywhere near the exposure to subprime that many other places due, the fact that the global credit markets are locking up is still going to hurt the financials. This could potentially spill over into the broad economy there as well which is something that policy makers and traders with exposure to Australia are watching closely. Hope that helps. Best Regards, Dave __________________ InformedTrades University \| IT Shopping Guide \| Site Map Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

10-06-2008, 01:01 AM	#14 (permalink)
Unregistered Badges About Assets Posts: n/a InformedPoints: 0 [Points Log]	Good start but not deep enough I see what you are saying with your explanation, but I don't think it goes deep enough. What's more it puts seems to point the blame in the wrong direction, but everything you say is true, but the deeper history of Fannie Mae and Freddie Mac not being discussed, the reason for their creation and the oversite they have had from the original owners, the federal government, don't do Greenspan, Bush and the sitting party alot of justice. Greenspan did lower interest rates, there is no question of that. And it was to keep us from a recession, no different than Carters secretary of the treasury Bill Miller raising interest rates to create a recession, in Carters eyes, to prevent a depression. All that being said, the history of it. Fannie Mae was a created by and run by the federal government in 1938 to replenish the money available for home loans. They were there to 'buy' mortgages from banks and to make FHA loans for homes. In 68 Lyndon Johnson made Fannie Mae a mostly private company and authorized it to buy conventional loans. Then in 1970 the fed created Freddie Mac for basically the same purpose, and to end the monopoly in that business. Both were private but the feds still had alot of oversite. Up to this point things are good. Then in 1981, they begin purchasing ARM mortgages, the beginning of the end. Then in 1998, Fannie Mae announces the national availability of Flexible 97, a new mortgage product designed to expand home ownership through a low three percent down-payment requirement. This is when the gambling starts, the requirements for loans are really loosened and the housing market responds from all the easy money. All the while, banks are trying to keep up and needing to conform with these lower standards to continue to make loans. The amount of money available to people to buy houses skyrockets and the housing boom is in full swing. Developers actually begin making loans themselves with 2 year notes and final balloon payments for the full selling price of the homes they are selling, and not even collecting a monthly payment that would pay the interest on the principal of a loan for the value of the house. Meanwhile, houses are selling at an unheard of rate, which artificially inflates the value of the homes being sold. The developers are making money hand over fist, selling the loans off as fast as they are made. All the while, folks that could have never afforded the homes they are living in are fat dumb and happy, for about 24 months. Then reality sat in. The balloon payments came due, which of course required a loan to pay, and the banks looked at these people and laughed, they were never qualified, nor did they have any ability to make the payment on a house of that value. The banks were not going to loan the money and the foreclosures began. This was the true pin that started the bubble bursting. Now, as the 2 year mortgages were coming due of the balloon, and the required payment of lets say $250,000 was due, a second problem was created, now in addition to the folks that couldn't afford theirs houses were being foreclosed on, the people that could afford the loans also began being forclosed on because the house they paid $250,000 for is only worth $189,000 so that is what the bank will loan. Banks are not in business of making loans on things for more than what they are worth, they tend to loose money that way. So even qualified buyers are now loosing their homes due to not being able to get a loan to pay the balloon payment. So, who's to blame? There were buyers that had no business getting loans they couldn't pay back, but there were also fully qualified buyers, that chose a cheaper loan for other reasons that were also part of this, so it's partly the buyer. The developers/builders? They were writing the paper that created alot of this, so can we point the blame at them? Again, yes and no. They were writing mortgages that someone else was buying up, if there were no mortgage buyers, there would be no loans written by the developers. They are not in the mortgage business, they just build homes, as cheaply and quickly as possible. So is it the bank down the street that was making the loans< not really, they needed to compete. The saying is "When in Rome" I believe. So we get back to Mac,, and Mae. They created the ARMS and all the other odd ball low interest loans, but the real question is why. Personal opinion goes clear back to 74 to the Fair Housing Act, and more specifically the manner in which it was twisted to allow these loans in the first place.

10-06-2008, 11:55 AM	#15 (permalink)
David Waring InformedTrades Founder Community Host Badges About Assets Total Awards: 4 Join Date: Nov 2007 Location: Miami, FL Posts: 5,632 InformedPoints: 0.13	Glad to hear from you. Yes when I put this series of videos out about a year ago Fannie and Freddie had not failed yet so there was no where near the amount of information out there about the role that they played as there is now. From reviewing this information it does seem that they played a much larger role than it was initially reported so thank you for adding the details here. Best Regards, Dave __________________ InformedTrades University \| IT Shopping Guide \| Site Map Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

10-08-2008, 12:34 AM	#16 (permalink)
Unregistered Badges About Assets Posts: n/a InformedPoints: 0 [Points Log]	Australia hey mate how ya goen, i was just wondering how you think this crisis impacted on the Australian financial market?

01-07-2009, 01:51 PM	#19 (permalink)
oprice Badges About Assets Join Date: Jan 2009 Posts: 2 InformedPoints: 0	Confused If I am a bank and I shifted the risk by selling the mortgages to a third party, why am I not isolated from the crsis? What do I care about the failed payments?

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