SubPrime Mortgage Primer


Read this document on Scribd: CDO Powerpoint SubPrime Primer

Are you confused about the financial crisis in the USA that threatens to cause a global recession? So was I until I saw this humorous, but spot on presentation of how it all works. It’s like a weak computer program. As long as a certain set of assumptions hold true, you don’t have to worry about processing certain errors. Once conditions change, you let the machinery run and all of a sudden things come out what they come out, and it’s not what you like. The false assumption was that real estate prices would continue to go up. While in general that is true, as Roy Rogers said, “They aint making any more of it”, and the same applies to petroleum, economic conditions can cause local drops in prices which are significant enough to cause repercussions.

The unfortunate end result is that the rich assholes still have their money in Cayman Islands accounts and it is us poor taxpayers, already flattened by the burden of the ridiculous war in Iraq, that will ultimately shoulder the brunt of this one too.

16 comments to SubPrime Mortgage Primer

  • Kirk

    I think the sequence of events in the wrong order.

    First, in about 1997, some junior analyst invented CDS (credit default swaps). This enabled investment. banks to insure each other to further leverage their collateral. They figured that putting mortgages under this program was pretty safe if the mortgages were solid. Mortgage debts were packaged with other classes of investments to improve the risk picture. This was called derivatives. Derivatives became gradually more popular, then eventually wildly popular.

    But this created a place to stuff mortgage debt. The mortgage companies suddenly had a place to sell mortgages so they created lots of mortgages with bad risk customers and gave them adjustable rate mortgages that they would soon not be able to pay. Mortgage companies would quickly write mortgages then sell them to repackagers to avoid risk and make mega bucks before the mortgages became bad.

    The ARMs started to rise all at once, causing the bad risk customers to default. The defaults triggered an unexpected pressure on the CDS insurers. The CDS insurers could not pay. The derivatives market unravelled.

  • admin

    well the order may not be perfect but the gist of this is that the stinky mortgages got passed up the food chain that can hopefully absorb the bad ones in the traunches as long as not too many go bad and values keep going up, and meanwhile everybody makes money.

  • The subprime mortgage crisis is an ongoing financial crisis characterized by contracted liquidity in global credit markets and banking systems triggered by the failure of mortgage companies, investment firms and government sponsored enterprises which had invested heavily in subprime mortgages. Sometimes it feels heavily influenced and manipulated.

  • I use to work at a mortgage company and I never got why they would want to sell the mortgage note to begin with. I know that the originating company could sell the note for a quick profit and be rid of all responsibilities for the house in case of foreclosure. To see how much money a company could make just by collecting the interest over 30 years blows my mind. I wish I could start my own bank just collecting mortgage notes for people with “A” credit and sit on them.

  • admin

    A local co would want to sell the mortgage note because they *know* what a poor risk it is. They hope that the BIG BOYS who buy it could mix it in with their better stuff and do their financial wizardry that you and I are too dumb to understand, and thus mitigate the risk. The problem is *EVERYBODY* was doing this, so the big boys’ magic got sketchier and sketchier, but they kept doing it cuz there’s really no going back once you start. That monster needs to be fed constantly. My brother Kirk explained it pretty well above. Everybody was trying to distance themselves from direct risk with the crappy mortgages and take their profit and run. The only problem is it’s a closed system and if you’re clean and out of the woods on your local side of the circle, all the badness concentrates far from you on the back side. You think you’re safe but eventually that bad stuff on the back starts knocking over dominoes and if there’s enough momentum it all gradually comes back down to you as the dominoes fall, as my brother explained it.

  • Now we get to go in and clean up the mess. It is going to take a whole lot of work and there will be lots of families who lose out on their homes and financial futures because of shady mortgage practices.

    It really is a shame but we can’t change the past.

    Loan Modifications last blog post..Adjustable Stated Income Loan: How to Handle the Adjustable Part

  • The subprime fiasco was initiated by some greedy executives who invented the the swaps which are not regulated by the insurance industry. The investors portray them as insured investments after these high and moderate risk mortgages are bundle and sold in the open market.
    These mathematicians who formulated this are very good but it was based on the premise that the housing industry will go up and up. But it didn’t, so now we all have to pay the price.

  • Yea, thats exactly it, they were giving people too much credit and many people were leaving beyond their means while banking on their house price increasing a large amount. Now that didnt work and poof, were in this big mess.

  • This is pretty funny. I actually just read an article from the writer of “Liars Poker” which did a really good job of explaining exactly what the “shit” is.

    Steve Heidemans last blog post..Comment on The Fed Funds Rate May Fall, But Mortgage Rates May Not by Steve Heideman

  • if a greedy banker can knows he can sell on mortgages and thus sell on the risk associated with them then it stands to reason that he is going to build as large a collection of mortgages as possible – regardless of the quality of client – ad simply cash in.
    Where the greedy banker got stupid was when his bank also bought other banks mortgages.
    Sheisters selling to sheisters.

  • I agree with your article, i think the problem is that the government makes the tax coding and the tax payers bearing this burden. The mortgage time bomb is a very real problem facing millions of American families or it is effected by inflation.

  • i really hate to get a mortgage but sometimes you just can’t avoid getting one,’”

  • Money is the barometer of a society’s virtue. -Ayn Rand

  • F*** those scumbags who got the whole country in this mess. This is such an honest depiction of what happened. Everyone is to blame:
    1. Greedy buyers
    2. Mortgage companies
    3. Investment banks
    4. Oversight agencies
    5. Ratings agencies
    6. The government (for not letting the house of cards fall and allowing us to rebuild)

    We are in such deep sh**.

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