Well, the original idea of subprime mortgage lenders was pretty good in my opinion. Most of the Americans thought so too. However, things have gone in a wrong direction and after a while totally lost control. The loans offered by these lenders provided the chance to those hard working citizens who were getting a regular passive income and had a rather high chance of surviving with their mortgage, car loans or even their credit card payments to live an absolutely normal life and stay out of any possible existing financial trouble. If you had the option to check all these aspects from a different perspective you would realize that these people simply were offered a chance to keep up with most people in the United States.
What really happened is that people started to buy the house of their dreams outside of the agglomerated cities. Everyone was happy. Nevertheless, we are dealing with Yang/Ying even when talking about financial aspects of our life (in case we are not aware of the nature of things) and that’s why most of the way of the subprime mortgage loans started to head towards an absolutely wrong direction. Most of the manufacturing jobs that have been around there for decades started to be shut down. People began to lose their workplaces. The panic started. For normal people, losing a good job is probably a catastrophe.
On the other hand, in the banking industry, things have started to also go terrible wrong. In order to produce money that were required to provide more loans to people, banks needed to start selling loans to other mortgage companies. This practice is well known in the finance world as derivatives. Basically what we are dealing with here are those mortgage loans that are structured together, one with another and afterwards (in a very short period of time) sold as tools for building wealth and money to banks and the majority of stock brokers who took part in this operation. This is how it really works ladies and gentlemen.
However, the time has come and people started losing their jobs. The derivates lost their value little by little. Inevitably, this caused a major chain reaction that pushed the well known subprime mortgage lenders into a total foreclosure. What really happened the moment that special downward type of cycle appeared is those banks and companies that used to deal with mortgages became totally insolvent. This is what specialists called the “domino effect”. The overall economic situation also influenced in a critical manner over this and forced the subprime mortgage lenders to get back their mortgages. This process caused more simple and hard working citizens to abandon their mortgages which caused all the existing derivates to lose their value. Several existing liquidity problems caused a total mess for smaller banks; this is why these went into failure. On the other hand, the other ones raised their interest rates so high that they became unreachable for the average American Joe. Soon, most major banks began to go into failure. Believe it or not, this is what really happened.
Those increased interest rate that we talked about caused more people to go into total default with their businesses or mortgages. In such a way the domino effect continued. The collapse of larger and bigger mortgage companies plus many banks was a process basically impossible to stop. So, because of the issues and all the problems with subprime mortgage lenders, the FR (Federal Reserve) and the TD (Treasury Department), together with the assistance of the US Congress tried to get the country back on a stable financial ground once again. However, everyone knows that several years were necessary for this financial crisis to occur, so if you are a grown up you should realize that it is basically impossible to fix it in one single night. It is going to take time.
Billy,
ChateauMortgage.com