@squirrel

I am basically providing the subtext behind the entire sub-prime lending practices.

Like I've said before, it wasn't that poor couldn't afford their homes, but that many lenders were including language in the contracts that pretty much (over time) landed the borrower in default if they were a month late in payments.

It was the penalties that did it, not the lending.
I've known more people that have gotten bad credit from spending 40$ in one day.

My first bad credit experience: Bank of America
19 purchases in one day, most of which for less than 5$, landed me 700$ in overdraft fees. Nevertheless I made 150$ a week, and was in school, and my rent was 400/month. Guess what happened to me.

It was usurious behavior like this, that has left the housing economy in shambles, not the consumers.

It didn't collapse under it's own weight, but from banks looking to make more money.

Banks are given permission to do whatever they want as long as the customer signs the contract (even without reading it or being informed)

I think that's a fair description of what happened.

If I could add one thing it would be the following.

A significant number of the people that bought houses using risky mortgages these last years did so expecting the price of their houses to keep raising ( that's the only way they could afford them) and so did the bank lending to them too.

That is probably the root of the issue.

Housing market is not different of any other market, prices kept raising so everyone wanted in, even if it meant taking bigger and bigger risks to get in and using more and leverage ( no down payment).

As soon as the prices of the houses started to stagnate and then go down, the whole system exploded....

It's not different from the 2001 market crash where stocks kept going up so everybody wanted in and nobody ever thought it would one day go down, same with houses, noone ever expected the price of houses to drop ( I know this sound stupid but that's the root of the problem lol).

Our posts are the same, except mine follows a chronological order. 1990s sub-prime lending was introduced. Later on the repubs allowed for cannibalization of these people following heavy deregulation in the mid 90's.

@ail
yup, totally agree.

it is a combination of factors, but the devaluation of homes is directly resulted from homeowners defaulting because of usurious mortgage contracts.

Being able to afford a home is quite a bit different from being able to convince a bank to give you a mortgage ... The long standing guideline I have heard several times for what someone can afford for a mortgage is whatever you can get on a 5 year fixed mortgage spending less than 35% of your take home income amortized over 15 years; even though people can qualify using 50% of their take home income on a variable rate mortgage that is amortized over 50 years this does not mean they can afford their mortgage.

The housing market began its decline because no one who could afford a starter home wanted to buy a starter home, and it began to make far more sense to rent than to buy in most markets.

The reason the bank themselves are collapsing is a little more complex.

Basically banks are required to have a certain amount of capital based on how much money they have lent.

The system is however tricky as that capital can take many forms.
It can be obligations, cash, pretty much anything you can give a market value to.

Most banks had complex obligations schemes as part of that capital , the famous subprimes packages ( basically it's kind of a fund of mortgages with a mix of good mortgage and subprimes mortgages, the idea being that by mixing the rate it pays is higher than by having only the best mortgages and the fact there are subprimses mortage is supposedly offset by the good ones so it shoudn't be an issue if a few mortgage default ( that's where the big mistake was made)).

Anyway suddenly some people started defaulting on their mortgages, and as the result the price of those mortage packages went down, the problem being that suddenly nobody wanted to buy them.
So their market value dropped a lot and it even became hard to guess how much they were worth due to noone buying them ( the funny thing is that most of those are still worth quite a lot but only if you keep them till expiration of the mortgage/obligations package).

Due to this suddenly the capital the banks had went down a lot and some started not to have enough capital to cover the outstanding loans they have out there...
In that case pretty much the only solution a bank has is to raise capital through a stock offering, problem is bank stocks went down the toilet due to the fact that banks had all those mortages that noone could give a value to and the market really doesn't like that...

Once those banks coudn't show the necessary capital, they were dead....

Diminishing standards in lending sure didn't help.

7 years ago when I left France the longest mortgage you could get over there was 20 years and you needed a 25% down payment to purchase a house. Recently they started to introduce 30 years mortgage and lower downpayment, I think after this they are going to go back to stricter standard ( the downpayment insures than if the borrower stops paying and the price of house goes down the bank still doesn't loose..)

PS : 25% downpayment and 20 years mortgage seem harsh, but i can assure you that if it had been the standard in the US the price of houses woudn't have skyrockected like it did..

The Dow's closed at a 370 point loss, so not as bad as a few hours ago. But still less than 10000.

You and half the members of congress have something in common.

has it fallen anymore....where do you find out this NTSE n stuff from?