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How We Got Into This Mortgage/Derivative Mess



October 13, 2008 – Comments (1)

On Sunday on a nationally syndicated financial talk show, Daniel R. Lee, author of HouseTrap

[HouseTrap: Who Set It? And How to Escape From America's Mortgage and Housing
Crisis (Paperback)
by Daniel R. Lee (Author)
# ISBN-10: 0595531466
# ISBN-13: 978-0595531462]

Here, before I forget, I imperfectly summarize what I heard. PS-I certainly do intend to buy this book. It may not be of much help on how to get out of the current sticky wicket, but it will, at minimum, be one step to helping me learn how we got into the current disaster (not to mention why all my real portfolios are down by about 1/3).


Community Reinvestment Act (CRA)

Early 1990's

Securitization of non-prime mortgages. Financially, they perform, and demand increases. Non-primes and their derivative products become very popular and profitable.

Mid 1990's

CRA terms liberalized. $1T more non-prime loans originated. FRE and FNM under pressure to ease lending requirements.


$500K of home sale profits become tax deductible, causing beginning of housing bubble.


9/11 occurs, Fed reduces rate to 1%, dramatic increase in loan activity.


Greenspan, encouraged market to create more alternative loan products, saving $$$ to borrowers. Wall Street investors hear him:  Low rates, proliferation of retail loan products.


Housing Bubble Bursts. Securitized non-prime loan derived instruments stop performing (interest only loans & ARM's blow up, people can no longer flip their homes). Rates raised to 6%, alternative products disappear.


Wall Street has no appetite for non-prime derivative financial instruments, so lenders are not making these products available to individual borrowers. Borrowers have nowhere to go: defaults rise from 15$ to 45%.


1 Comments – Post Your Own

#1) On October 13, 2008 at 9:50 PM, dwot (29.15) wrote:

I'd blame poor lending standards.  What we accept as normal are actually already loose lending standards.

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