This is an awesome conceptualization. Very helpful. Out of curiosity, have there been any particular agencies tasked with reevaluating the credit rating agencies? It seems like that’s a task fraught with conflicts of interest and could take forever.

Thanks for the comment, Canadian Mortgage. US Senate Banking Committee is looking into this. They have a long road ahead to revamp the rating agencies and the models they use.

Great post. The portion about “When did they start lowering standards for homebuyers?” highlights the progression over the long term but I even saw standards really change over the 7 years I have been in the real estate business. It use to be that 100% loans were almost impossible or at least very rare to be able to get. From around 2003 – 2007 it seemed like everyone was getting 100% loans, or even 103% in some cases. It was almost expected by buyers that they could get into a home with no money down.

@ Canadian Mortgage: Here is a link to the latest U.S. Senate Committee on Banking’s hearing on “Turmoil in U.S. Credit Markets: The Role of the Credit Rating Agencies” (4/22/08):

http://banking.senate.gov/public/index.cfm?Fuseaction=Hearings.Detail&HearingID=709b68d2-6e2b-4048-bf86-19fdc01ecec3

You can listen to the hearing and read various statements from senators and witnesses (SEC, Moody’s, Fitch, R.W. Pressprich, etc) on the topic.

Dr. Park, in your opinion, will we see crdit card crisis coming soon as homeowners stretch their credit limits to catch up mortgages?

Professor Park –

Thank you – this blog and your imagery were incredibly helpful to understanding this mess. Without asking you to disclose your political leanings, I would be interested to read what role you think the US government should take in fixing this situation and what, if anything, you think should have been done to prevent it.

I would also be very interested in your reply to Xiaomei’s question.

We have a similar problem here in the Woodstock, GA real estate market. You have done a great job in helping the public my real estate agents understand the current situation.

Sadly Las Vegas had a huge number of these loans. Several companies went under and foreclosures are skyrocketing. But home prices have stopped falling and sales are picking up.

“As to buying a house, let’s wait.”

Doesn’t that depend on the individual circumstance? If an investor or homeowner is buying a home and intends to keep the home for 5-7 years minimum, does it maater what is happening now?

“And along with the housing boom came the growth of the mortgage lending industry.”

And the onslaught of everyone and his plumber originating these loans. It seemed everyone in Florida during the boom was either a home flipper, real estate agent or a mortgage rep.

A couple of comments / corrections. MOrtgage interest was fully deductible long before the tax reform act of 1986. However, that deductibility, and the deductibility of property taxes has been a strong selling factor in the real estate process, especially for first time home buyers. Variable rate interest loans, in which the rate and timing of increases and decreawe4s (1/4 % each 6 months, maximum up 2.5% and down 2.5 % were introduced in 1979. Adjustible rate ooans, in which there were far fewer constraints a year later. For some time, the O. T. S. (OFfice of thrift suopervision) regularly set standards for how lon the introductory, or teaser, rates could be. IN recent years, they seemed to look away from that, particularly as mortgage bankers. who were not regulated by them began offering loans with much lower start rates. IN addition, the O.T.S. had rules governing the rates at which borrowers werew aualified for their mortgages, the mortgage bankers had no such rules. I must assume this lack of watching on the thrifts was to try to level the playing field.

I was once the C.O.O. of a thrift-owned mortgage compoany.

How come there wasn’t any mention of the ‘community reinvestment act?’ This program encourages lenders to make risky (subprime) loans.

“It’s practically impossible for the investors in this market to understand or know the credit risk of the underlying securities when the underlying loans are pooled together from many different sources and are repackaged multiple times.”
When it seems to good to be true…..

Here in the UK lenders have tightened their criteria for lending, pushed up their interest rates, and withdrawn many of their popular products. This, they say, is due to the ‘credit crunch’ that has hit the UK, and the fact that overseas financial institutions are no longer lender them any money. Our Government responded to this by gifting them billions of pounds to try and alleviate the problem. However nothing has changed, in fact interest rates continue to go up, and lending is as tight as ever. Why the Government did not ask for something in return for their billions of pounds from these lenders – well who knows? It has not helped the housing market one iota.

The sub prime mortgage crisis has reached a tipping point with Freddie and Fannie as well as Bear sterns being taken over. There has never been government intervention needed to support so many mortgage giants in such a short space of time. We need to watch these proceedings carefully.

Very interesting article. Thanks for the valuable insight Professor Park

Didn’t this fiasco really start in l977 with regulations that required mortgage lenders to make loans to individuals or areas they were “redlining”?

That is an excellent article. Thankyou for taking the time to write it.
Colin

This was a 911 attack to our economy. They took the high price gas money and reinvested in short term subprime mortgage securities. Go and read 1980 Latin America Debt Crises as they have done this once and collapsed Argentina, Brazil, Mexico economy and learned from it to harm us and the rest of the world. When are we going to have our Homeland Security to look into it? When?

Yes, this indeed is well written. I wish the banker
would read it. Honestly, why do they have to tighten
up so much now? Do you know how hard it is for a well qualified
responsible credit worthy person to get a simple loan.
It is ridiculous. The overreaction is what is
killing the economy now. It would also be great if
banks offered feedback on how much they would lend
for a house and not just decline the loan. There is
a lot of incompetence in the banking industry. Originating
with those no-money secondary market loans, and now
with the over super qualifying loans.

-David G.
sell virginia house fast

Wow this is a great blog post Prof. Park. What you wrote back in May is exactly how things are turning out.

Very well written and complete explanation! Hopefully some of the negative inventory sitting on the real estate markets will get pushed through soon and the rebuilding of equity can begin.

Too many people got homes they couldnt afford. its too bad really

We saw tons of 100% mortgages!

This article is a very good overview at what happened in the U.S. with the subprime. Basically, bad decisions from banks are resulting in catastrophic impacts.

We even sold a fresh out of college student a home for $250,000, no money down at all, seller paid the closing costs!

wow. that is alot of information. I dont even know if I could do all that. And thank you so much for lettming me in on all the info.

great blog post with complete explanation. i like it

Thanks for the valuable insight Professor Park. How do you see the Middle East real estate market doing over the next 12 months?

Great information! Thanks for writing a detailed post. Unfortunately a lot of people got into purchasing homes they couldn’t really afford and are facing some really difficult times of their lives.

Tremendous detail and very informative.

Thanks for the post.

Wow this is really interesting when you break it down and look at it. It shows how much subprime loans have hammered out economy

Nice, informative article, good breakdown of the credit crisis. Especially like the graphic.

Finally somebody who writes the truth. I work in las vegas nevada for a commercial real estate company and we’ve seen it here. I just keep moving forward and working hard.
thx for the post

It’s amazing how complex this gets! It will be intereting to see how the rest of this unfolds over the next couple of years and how many lessons our financial institutions will learn. Lets hope nothing like this ever happens again!

Big banks and finance knew these complicated financial products were junk. They dumped them on the market and profited handsomely.

In regards to why did they start lowering credit standards for homebuyers, one could argue it was to offer mortgages to people who the lenders knew could not possibly afford in the long term.

People get mortgages they can’t afford…lenders let them…the government simply turns to look the other way. It’s a never-ending cycle that, even in the current financial climate, still will not end.

A good post please keep going

Please, are you able to PM me and notify me couple of far more thinks about this, I’m truly fan of your website…

What a fantastic explanation to what happened to the subprime mortgage. What strikes me, is that when this post was written nearly two years ago, you were correct about everything. I do not think we are even close to bottom yet and places like Las Vegas, where I live, are dropping so fast and violently, nearly a few hundred thousand people or more may find that their lives, if they haven’t already, will be completely changed forever. I do not see this housing correction in Las Vegas specifically changing in my lifetime. Any predictions? Thanks so much!

Thanks very much for a nice little read.

It will be intereting to see how the rest of this unfolds over the next couple of years and how many lessons our financial institutions will learn. Lets hope nothing like this ever happens again!

Wow, this is a great site. Thanks for the share =)

Very interesting article Professor Park. Would you care to give us your present day insight two years on?

This was a 911 attack to our economy. They took the high price gas money and reinvested in short term subprime mortgage securities. Go and read 1980 Latin America Debt Crises as they have done this once and collapsed Argentina, Brazil, Mexico economy and learned from it to harm us and the rest of the world. When are we going to have our Homeland Security to look into it? When?

It will be intereting to see how the rest of this unfolds over the next couple of years and how many lessons our financial institutions will learn. Lets hope nothing like this ever happens again!

Thanks for sharing this..
It’s been a couple of years since the crisis began, and the economy is still not up to where it was before the crisis yet.
It’s interesting to see how many more years needed for the government to get the economy back on track.

Subprime mortgage is not the culprit. But the way of dispursal is the reason for the credit crisis. Every security norms had been thrown away by the banks to defeat business competition and to earn a huge profit.

Subprime loans are not the problem, they were badly written debts by hungry banks.

Great post, I am asked about this all the time!

Prof. Park-

As a bankruptcy attorney I see so many people who’s mortgages spiraled out of control and they now face foreclosure. Really, it doesn’t look like it is getting any better. Thanks for the information.

Anthony

Great post, I love how you break everything down.

Well its been over two years since this article was published and things don’t seem to be any better now than they were then, maybe even a little worse. I guess we need to just hope for the light at the end of the tunnel. One thing is for certain, we’re closer to it now than we were in May 2008!

First off – great info-graphic, great way to give a picture depicting the market.

The economy is still down, as it was in 2008 – However, there are still hopes for the future. There have been some credits given to new home-buyers which is at least an attempt to alleviate this situation. Hopefully, we continue to keep the money moving in the real estate market.

In Birmingham, we haven’t had it as bad as other areas. My friends in Tampa are in completely different situations that us.

This whole mortgage debacle has left many families in shambles. Our country is near collapse and the people that are suppose to navigate us through this mess understands it.

Not only subprime loans were the problem, you can see the same now in Europe (Greece, Ireland etc.)

H. Tieben
http://www.mth-partner.de

There really is no solution to that problem.
Of course there are government agencies that help pay mortgages but the government also has to help banks that go bankrupt because they will cripple the economy.

-Anna of Eton Properties

A loan that is made at a higher interest rate than most other loans. Subprime loans are made to borrowers who do not qualify for ordinary loans because of bad credit history or some other reason.

It is sad, that to this day business, despite record piles of cash, are not hiring more. It is the only way to get the country on its feet again, yet private business can’t get their act together to help not just the USA, but the world. I wonder when this sub-prime mess will ever be behind us.

The relatively small number of mortgage defaults is a huge number for the credit markets to absorb and it is growing. In San Diego, California, for example, mortgage defaults are continuing at the pace they have been for the past year and the pace does not appear to be slowing. Mark, Bankruptcy Attorney in San Diego.

They were trying to get out of their stake but there is a ton of Chinese bank equity sales and Then again, I’ve never understood why ANY small investor would use a high-service brokerage, given their long long record of selling inferior branded products with high costs and poor performance.

Interesting post :)

Call me wind because I am abolsuelty blown away.

Thank you Luther! We are looking into it now. I greatly appreciate you bringing this matter to my attention.

Best,
Audra Quinn
Managing Editor

You say that the derivatives market took off in the mid 1990s.

Question: Did the derivatives market exist in the US before The Financial Modernization Act of 1999? Or if it did exist was it a dominate source of risk — in the trillions of dollars — to all the other layers in the market?

How did banking deregulation and the rise of the “institutional speculator” play a role in the development of the derivatives market?

If we argue that in the past markets were driven by rational risk taking on the basis of success — or at least cutting your losses before its too late — does not the incentive to bet on market losses encourage an ironic “rationality of unacceptable risk”?

By way of example the documentary, “House of Cards”, depicts a trader who made a killing speculating that the bubble would burst. Hence my question: Would betting money on the probability of loss have been possible ~30-odd years ago?

great post with your model you can see where the mass of theft took place
on the second and third floor.

Well its been over two years since this article was published and things don’t seem to be any better now than they were then, maybe even a little worse. thanks for information..I really like to know more about subprime mortgage crisis.

very well written, Hopefully some of the negative inventory sitting on the real estate markets will get pushed through soon. There have been some credits given to new home-buyers which is at least an attempt to alleviate this situation.