Mortgage Meltdown and The Credit Crunch


Can someone explain what is going on with this current credit crisis?


Putting too fine a point on a storm that is still raging is a bit like calling the game before the clock reads 00:00. With that humble segue, here’s one banker’s version of a halftime recap:

The Mortgage Meltdown of 2007 refers to the chain-reaction now unfolding in the global financial world as a result of years of high risk mortgage lending. The result has been a massive tightening of lending standards for consumers and a global credit crisis for banks and their investors.

Background: Over the past few years, an excessive number of mortgages were made to borrowers with substandard credit. Now, millions of these borrowers are either delinquent or in default ‘ the final step before foreclosure.

Most U.S. mortgages are tied to global investment markets on Wall Street, where investment banks bundle them up and convert them into securities. These mortgage backed securities (MBS) are in turn sold to private and government institutions both in the U.S. and abroad. With the rise in mortgage defaults, a wave of financial loss has spread worldwide.

As the value of these assets decline, investors are demanding steep discounts on mortgage investments (their discount = our cost) or are staying away from mortgages altogether. With no one to sell to, lenders can’t free up their credit lines and take on new loans. As a result, over 100-mortage companies have shut down ‘ and thousands of homeowners and home buyers have been left with no way to finance their transactions.

Now, this vicious cycle has begun to hurt home values as fewer buyers can qualify and sellers are forced to lower their prices. As we are seeing, this slow-down poses plenty of danger to real estate equity here in the U.S. and global investment fortunes the world over.

Given the Fed’s much-needed rate intervention on Friday (08/16/07), it might be fair to say we’re in the eye of the storm, waiting for the wind and rain to resume before hopefully blowing over.

Answered almost 10 years ago
Lance J.
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