Subprime made simple

One of the biggest problems is that the public doesn’t understand the current economic situation, and consequently we tend not to be concerned about things that we don’t understand, and think about other matters which don’t tax our brain much.

I’m going to give you the simplest explanation possible about sub prime mortgages and the securities that are created by the wall street bunch, and sold to banks, insurance companies, pension funds, and a never ending list of buyers who have been ripped off by those who have benefited from the creation, sale and resale of these sham mortgage -backed securities.

photo credit: TheTruthAbout…

Bear in mind, that this farce was created by the various Wall Street investment houses (I refuse to call them banks), which, in the long run were driven to bankruptcy and failure, and we, the citizens gave the same people the money, 770 Billion, (just a down payment, I suspect) to rescue these thieves. No one can even guess what will happen next, but I can assure you that the old banker’s adage, “You can’t borrow your way out of debt,” will still be valid.

Secretary of Treasury, Hank Paulson, and friends even gave the investment houses and banks and other failed institutions back to the promoters who ran them before, (or their underlings) and financed the losses they created along with all the FDIC money, the Federal Reserve Bank, and the U.S. Government Treasury Department itself! It WILL get worse, as the rest of our citizens realize what happened to them!

Way back, I promised a simple explanation of Sub prime actually are. Leaving out most of the complicated and hard to understand issues, here is the scoop.

Remember just a few months ago, the radio and TV commercials were jammed with commercials promising low cost financing to nearly ANYONE, regardless of their credit score, a new low interest rate home loan or refinance at low interest rates? It seemed that every mortgage broker had a deal you couldn’t pass! If fact, many of them weren’t even licensed brokers. These new loans were often made without appraisals, credit reports, or verification of income. Soon, people with little or no real credit were using leveraged home equity lines of credit, (HELOC) to buy another house, a new luxury car, a vacation home, and anything else they couldn’t afford.

These mortgages were then sold to investment firms with the expertise to bundle them up, sometimes with a few good credits, and sell the resulting instrument to investors all over the world, including your local bank(s), large mega banks, and wealthy individuals. I’m talking about the most simple of the so called MBS, (Mortgage Backed Securities). There are many different derivitives, but for our purpose we’ll stay with the basic MBS.

A huge secondary market followed, with brokerage houses buying and selling the same securities many times. There is nothing wrong with the secondary market with most securities, as they provide a market for the quick sale and settlement of a large market that were in this business,they employ sales people who are expert at high pressure double talk and woe be unto the investor who cannot understand what he is being told (or sold.)

Once again, it was a huge, world wide market, including almost every financial house and bank the world over. Greed was overpowering.

Then one day, not long ago, it all collapsed, and panic ensued. Mostly caused by buyers who could not afford to make payments of what they had bought, tried to sell them. There were suddenly so many houses on the market that the real estate sales dried up, and large and small builders were stuck with inventory PLUS the sales contracts that buyers had to walk away from, even though some had made substantial down payments. The real estate business went in the tank as did new home construction.

The next step was the banks, large and small that were furnishing the construction loans for the large anticipated market were forced to draw in their commitments and the builders began to go broke or stop business. So we have no buyers, no financing for construction, few stable builders. a zillion or more houses for sale with no buyers. People couldn’t sell their homes for legitimate reasons, ie, moving for employment, upgrading their living standard, and the existing home market tanked.

In the meantime, the afore mentioned MBS securities were almost worthless, and we all found ourselves handing out nearly a TRILLION dollars to try to unravel the mess!

Now, that you know what happened, how will we get out of the situation?

More on that later.