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Quote by: rmnunez So I take it you think the problem is that banks are making too much profit. |
I gotta say, rm, when you don't want to see something, you
really don't want to see it. So yeah, if you want to put it that way, the mortgage lenders wanted to make too much money. They showed it by making too many "subprime", adjustable rate loans for overpriced homes to people who couldn't really afford them on the speculation that home equities would continue to keep rising indefinitely. In addition, many mortgage lenders sold the rights to their debts to other institutions in the form of Mortgage Backed Securities. Anyone holding these securities is now also facing serious losses as borrowers default and housing prices continue to fall, and that includes many huge overseas financial institutions.
From there it just gets downright funky...
--"Individual and institutional investors holding MBS faced significant losses, as the value of the underlying mortgage assets and payment streams declined and became difficult to predict. In addition, certain legal entities designed to isolate this risk from the originating lenders, called collateralized debt obligations (CDO) and structured investment vehicles (SIV), held substantial amounts of MBS. As the value of payments into these entities declined, their value also declined, forcing the sale of MBS at fire sale prices in some instances.
The widespread dispersion of credit risk and the unclear impact on large banks, MBS, CDO, and SIV caused banks to reduce their loans to each other or make them at higher interest rates. Similarly, the ability of corporations to obtain funds through the issuance of commercial paper was impacted. The liquidity concerns drove central banks around the world to take action to provide funds to member banks to encourage the lending of funds to worthy borrowers and to re-invigorate the commercial paper markets.
The combination of impacts due to credit risk and liquidity risk caused several major corporations and hedge funds to shut down or file for bankruptcy. Stock market declines among both depository and non-depository financial corporations were dramatic. Many hedge funds and other institutional investors holding MBS also incurred significant losses.
With interest rates on a large number of subprime mortgages due to adjust upward during the 2008 period, U.S. legislators and the U.S. Treasury Department are taking action. A systematic program to limit or defer interest rate adjustments was implemented to limit the impact. In addition, lenders and borrowers facing defaults have been encouraged to cooperate to enable borrowers to stay in their homes. Restrictions on lending practices are under consideration. Many lenders have stopped subprime lending or dramatically curtailed it."--
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