Life, Liberty, and my pursuit of Happiness

I have to admit that I know very little about what is going on right now with this whole mortgage thing (just out of college, not a homeowner, won't be for a while) but can someone explain to me how the hell this could have happened and who is to blame for this? I seem to recall somewhere in my history classes that after the crash of 1929 and everyone ran on the banks FDR forced banks to have open books so that government auditors could make sure that banks were making sound loans. If banks were found to be messing up then the government would either shut them down and give people their FDIC money, or take over the bank and start running it wisely. How is it that only NOW is the government figuring out that these loans were all terrible?

It's a perfect storm... traditionally, mortgages have required 20% down, then the bank would keep the debt on their books until you've paid off the house some 30 years later.

Some bright spark figured out that as a mortgage is fairly reliable debt, you could sell it on to someone else and not have to sit on it for 30 years to get your cash. So local banks just became mortgage brokers, selling the mortgage then selling it on. So far so good.

Then someone figured out that you could package a whole crapload of mortgages into a big package and sell it to large institutional investors, pension funds, foreign governments, etc. at a discounted rate. The size of the package meant that the seller still got rich and the big buyers wet themselves at the prospect of huge profits in the future on all this rock-solid debt.

As the big buyers wanted more of this deal, interest rates were low so they borrowed as much cheap cash as they could get their hands on, but as there's only a limited number of people who can afford 20% down and have good credit the supply of mortgages was thinning out.

As the buck was being passed on through various middle-men, mortgage brokers realised they could sell mortgages using whatever pack of lies they wanted to unsophisticated buyers who didn't realise they couldn't really afford that $300k house on a $30k salary.

As everyone could now afford a mortgage (or at least lie on a form to say they did), the supply of housing dried up - this is why house prices shot up, homebuilders started throwing up god-awful cardboard McMansions everywhere and your waiter at Starbucks was just closing on 3 super-hot condos at "10% of what they'll be worth in 5 years, dude"

The mortgage brokers sold the loans on to firms who packaged them up, then these packages were given a rating by an independent agency to show how safe they were to potential buyers. These rating agencies were bribed or mislead into giving the packages "AAA" ratings (ie. as safe as money under your mattress or in a savings account) which boosted the selling price of the packaged mortgages and let some investors who should not be making risky deals (ie. pension funds, hospitals, governments) join the party too.

So brokers are getting rich, ratings agencies are getting rich, banks are getting rich, unsophisticated idiots and dumb speculators are living well and the Government's got plenty of cash to pay for a very expensive war.

All while this bad debt is creeping through the veins of the International banking system like an undiagnosed cancer.

Then the first round of shiatty adjustable-rate mortgages "reset" (ie. the free trip to Disney that came with the house is long gone and that 1% rate shoots up to 8%). Your high school janitor can't afford to pay $4,000 a month in mortgage payments and defaults. This happened a whole bunch of times and suddenly that "AAA" rated debt which is now many many transactions away from the original broker vanished from the books of some bank somewhere.

Once that happened, the banks woke up from their orgy of spending and realised that maybe it wasn't so smart to put all their money (and a lot of borrowed money) into sub-prime mortgages. Their bean-counters did the sums and realised that there's a good chance they'll go broke. There's a collective sound of a million pinstriped suits being soiled that echoes throughout the world.

The supply of cheap mortgages dries up, which means houses prices start to fall back to reasonable rates - if they hadn't massively overbuilt to meet what many thought was infinite demand, that is. Chances are there's quite a way to fall before demand outstrips supply again.

The rating agencies suddenly look like morons and mortgage brokers loose their shirts. The Government has blown it's wad in Iraq so there's massive cuts in schools, healthcare and other things less important than never-ending War.

In retrospect, subprime mortgages are a stupid idea. But everyone involved the process from governments to college kids mass-buying condos was either too blind with greed to notice, or felt like they could cash out their chips and get rich before it all fell apart.

Now we're all farked.