The Mortgage Meltdown Explained

The Mortgage Melt Down

Annie is any American who wanted a mortgage to purchase a home.  What do you do when you want a mortgage?  You go to the bank and let’s say Annie got a 6% percent mortgage.  The house is collateral and the bank gets a payment every month.

 The banks used to only give out as much money as it had on deposit.  If they had 10 million they could lend out 10 million.  How do the banks make more money?  They take the money they make from Annie, keep a small part of it, say 1% and sell the rest to Wall Street.  Like Fannie Mae or Freddy Mac.

I’m sure you have heard of them lately.

 Fannie Mae and Freddy Mac, who bought the loans, are now making 5%.  But they want to make more money so they do the same thing.  They keep 1% and sell the rest.   Only they sell Annie’s loan and yours and enough other loans to make a $100 million dollar Loan Bundle, called a Mortgage bonds. 

Those Mortgage Bonds are sold to huge investors around the world, pension funds, hedge funds, etc.  They make, let’s say 4%.

 So what happened then?

Then Annie’s interest rate went up or she couldn’t really afford the payment.  So she stops making the payment.  So the bank repossesses the house, only the house is not worth as much as the mortgage they gave Annie.  They not only have to repossess Annie’s house, they have to repossess millions of houses and the whole thing collapses.  They all lose their interest income and Annie loses her home.

Enough blame to go around!

Annie buys a house she can’t afford.                                                                                                                             The banks tell her she can afford it.

She is told the house will go up in value.                                                                                                                          She is told Interest rates will not go up.

The mortgage meltdown is primarily responsible for the economic trouble. The cycle started with regular Americans who were unable to afford their mortgage interest rates. As a result, banks foreclosed their homes.  Eventually, the effects of the home foreclosures reached a global scale, causing a financial collapse. 

Terry S. Forsberg, ABR, CRS, GRI, Associate Broker          RE/MAX Fine Properties 602-410-9547

terry@terryforsberg.com email   www.TerryForsberg.com website