The Mortgage Housing Crisis

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The Mortgage Housing Crisis

The Smiths entered the front entranceway of a matured colonial home on Main St. They immediately began to envision themselves sitting by the fireplace on Christmas morning with their 2 children while they opened their gifts in their pajamas. The agent used every sales pitch in the book, but after finishing the tour, the Smiths minds were already made up; they were going to put in an offer. “We’ll take it,” John Smith said happily as he kissed his wife and they smiled at the agent. The agent replied excitedly, “Excellent!” and they headed back to the real estate office to sign the paperwork. The final purchase price of the home was the low price of $650,000. The Smiths put down a down payment of only $50,000 now owing the bank a total of $600,000 over the next 30 years with a fixed rate of 14% yearly compounding interest. This short snippet in time has been seen over and over again in our country. People head out to inquire about a mortgage, they start with a pre-approval and a number in their mind of what they can afford, then get approved for much more than they ever expected, and then they end up buying a home that they really could not afford. Like the Smith couple for example, they bought a home that was way over their budget but they felt it was the perfect house to suit their fantasy of the all-American dream therefore they would take the chance. The banks used to relish this type of borrower and over the course of history have made trillions of dollars off of the hopes and expectations of new homeowners. The Central banking system in the United States has been operating since 1790, when the United States government needed to gain a concrete financial foundation to deal with the accrued war debt. The government granted the banks permission to print currency and to clear check payments. The banks regulated the currency flow and went through four wars before the banking system went through a complete overhaul. In 1913 the central banking system was changed through the inception of the Federal Reserve banking system. The Federal Reserve then served as the main bank, due to the backing and security it offered. The Federal Reserve served as a form of glass door, where only the top .05% of the nations wealthy could command powerful posts and swing politicians and officers of the towns and cities, so they could all profit from the common man. The Federal Reserve and Wall St saw its profits skyrocket through the 20’s as everyone wanted a piece of the inflated securities and quick dollars. That decade flew by as newly minted millionaires flashed their quick cash and saw the market crash of 1929. The market crash ushered the great depression. The crash was lead by investors buying stocks on margin, where the investor would put some of his own funds down, and the rest would be borrowed using the brokers’ funds. The concept was that the broker could gamble the credit to win on a trade and the margins would be higher. This has been done and redone on the St, most of the time bringing about the same result. A bad trade brings down the dominoes on previous trades and previous margins. The “derivatives” trades are some of the riskiest securities money can buy, but if executed correctly the returns are also some of the highest yields on the St. You would think that bankers and brokers with their Ivy institution degrees would figure this out be able to be correct most of the time. In order to understand what exactly happened in 2008, we must understand the underlying strategies and investment theories used to cause the housing bubble to burst. There are many investment and portfolio management strategies that can be utilized when investing in equity securities and debt securities. What had occurred was that the major players in the mortgage lending business had taken money from other investors and had invested the money into securities that were derived from the mortgages rates and
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