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They're supposed to make it so anyone can get a home loan. Normally you need 10% down payment to even get looked at by a bank, but FHA loans (gubment) require 0-3.5% down. So more people buying houses equals higher prices.Quote:
Originally Posted by Hubbitron
Wikipedia says Fannie and Freddie owned 50% of the mortgage market in 2008. Any problems they had in 2008 were not insignificant, and that doesn't account for the influence on the market they had because of cheap/easy loans.
The 2008 crash only involved the housing market as much as a crash in the price of baseball cards involves Major League Baseball. The value of the houses themselves were inflated, sure, but the value of the securities sold based on the mortgages on those houses were leveraged to the point of insanity.
Those are not unrelated.
Of course they are related.
Look at it this way: you could have paid off every subprime mortgage in the country for under a trillion dollars. The eventual cost of all of the bailouts will be somewhere over 10 trillion. That's a lot of money based on nothing.
I don't think that's how math works but I haven't done math since high school.
The subprime market isn't the only thing that lost out. Housing prices inflated because of inflated demand. When demand shriveled, prices across the board plummeted. And those securities were bets against housing prices continuing to inflate.
In 2007, the housing market was worth 30 trillion (made up number, for the sake of illustration--don't try to verify it because it's not true). In 2012, it's worth 15 trillion (again, made up number). There's trillions of money evaporated, and it existed because of a false sense of infinite growth...perpetrated by easy home loans, some of which were subprime.
You're getting confused. The securities were not bets against the housing market. The banks did short the market when they realized it was going to fall, but that wasn't where they made their money in the years leading up to the collapse. The increased demand was a result of the banks making so much money from the securities - they literally could not find enough mortgages to chop up and sell off so the investment side of a bank would pressure the lending side to give out more mortgages. Literally anyone could get a mortgage in the early aughts. If you had a job, that was enough. The banks didn't give a fuck whether these people paid their mortgages or not because they made money either way from bundling the securities and selling them off.
MarkRyan, Dave is right. The bets weren't based on the market failing, but on the securities failing. And then there were bets on the bets failing.
Look up how a CDO is structured. And then look up a "CDO squared." its all bullshit but that is what counts for "innovation" in America today. It's just a bunch of paper on top of paper. The growth in the subprime market was due to the growth in demand of those paper, not the other way around. That's what caused the crash.
That is, incidentally, why people hate all these banks now. They didn't get rich by coming up with a great idea and selling it in a competitive market. They came up with fake paper that they were then able to pass off to eac other a billion times, wrecking the one source of real wealth for average Americans in the process. And in exchange they got trillions of dollars from those same Americans. And then they started to cry like girls every time someone told them the truth.
Sorry, I didn't mean to imply that they wanted the market to fail. "securities were bets against housing prices" meant "securities were bets that depended on housing price increases."
Ah. That makes more sense, still a little off though. All those securities really depended on were most of the people paying their mortgages. I think they expected some of the lower tranche mortgagees to default - but eventually a lot more than them did.
Based on what I've read, most of these securities were worthless at around 8% default rate. Thing is, the default rate amongst subprimes hit like 30% or 40% a few years ago .
All this stuff was garbage - all of it. Some subprimes can be properly integrated into a portfolio if the risk is managed properly, just like junk bonds. But the banks had no interest in doing that because thy figured out a way to fool the ratings agencies.
They didn't think they would hit an 8% default rate, but once they realized they might, they did indeed sell the shit as gold and bet against it . It's like when Zack sold Screech's tomato sauce recipe even though he knew it was from a cookbook - total fraud.