Sunday, September 21, 2008

The Subprime Mortgage Crisis: The Mother of All Bailouts

"My momma always said, 'Life was like a box of chocolates. You never know what you're gonna get.'"--Forrest Gump

Wikipedia has an article on the subprime mortgage crisis:

The crisis began with the bursting of the United States housing bubble[1][2] and high default rates on "subprime" and adjustable rate mortgages (ARM). Loan incentives, such as easy initial terms, in conjunction with an acceleration in rising housing prices encouraged borrowers to assume difficult mortgages on the belief they would be able to quickly refinance at more favorable terms. However, once housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult.

It's a very complicated subject, but it sounds like a lot of people bought houses even though they couldn't afford the mortgage. They gambled that the price of their houses would go up. There seems to be plenty of blame to go around, and everyone is pointing fingers at each other. It appears that some mortgage brokers didn't make an effort to qualify their buyers.

Here is a diagram of the subprime mortgage crisis.

Wikipedia comments:

The reasons for this crisis are varied and complex.[21] The crisis can be attributed to a number of factors pervasive in both the housing and credit markets. Some of these include: the inability of homeowners to make their mortgage payments; poor judgment by the borrower and/or the lender; speculation and overbuilding during the boom period; risky mortgage products; high personal and corporate debt levels; financial innovation that distributed and perhaps concealed default risks; central bank policies; and regulation (or lack thereof) [22]

...Speculation in real estate was a contributing factor. During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, nearly 40% of home purchases (record levels) were not primary residences.

Governor Palin claims on T.V. that her running mate John McCain told other Senators that there were problems in Fannie Mae and Freddy Mac, but that nobody paid attention. Hopefully he has learned something since he was one of the Keating Five.

I don't think Senator Obama knows how to take care of other people's money, either. He just knows how to redistribute it to his far-left political friends. He doled out 100 million dollars to ideologues on the far left who promised to improve Chicago children's educational achievement, and had nothing to show for it.

Secretary Henry M. Paulson, Jr., the head of the Department of the Treasury since July 10, 2006, is in charge of protecting the financial system, and he has outlined some measures he is taking.

When we bought our house, we had to prove we could afford our mortgage. The lender didn't take our word for it because they didn't want to lose their money. We bought a house we could afford to live in; we didn't buy a house we couldn't afford and gamble that we could sell it and make a profit. Now we will have to pay the bill for a lot of greedy people or else we will have a depression.

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