Who exactly gave homeowners the subprime loans?

[clatoden99]

In the years leading up to the 2008 crisis, who exactly gave homeowners the subprime loans, then proceeded to sell them to the large investment banks?

I’m reading The Big Short right now and my understanding is that lendors gave individuals loans that started off as fixed interest but then became floating, these loans were given to individuals without a thorough check of their income. They were then sold to investment banks and packaged into MBSs.

[frugal saver]

Two excellent books about the issue are The Sellout by Charles Gasparino and another by Thomas Sowell, don't recall the name right now.

True life example:

1. New people bought the house across the street from me in 2008 for $300,000. She was a stay-at-home mom and he was a cashier at Walmart. After we got to talking, they said their mortgage payment was $200.

--For how long-- "I don't know"
--What will it go up to when it resets-- "I don't know"
--How are you going to make the full payments-- "What full payments"
--Did you read the loan documents?-- "No"

After two years, their loan re-set to $4500 a month and they were screaming about how they'd been ripped off and cheated. At the foreclosure it was determined that everything had been laid out in the loan paperwork and they'd agreed to everything, but felt it wasn't fair to lose their house just because they hadn't read the loan documents.

They "punished" their lender by absolutely destroying the house before they moved out.

The housing bubble was a perfect storm of people who wanted houses they couldn't afford and didn't plan to pay for anyway, real estate people who wanted commissions from people they knew couldn't afford to buy and mortgage lenders who wanted the fees without questioning pretty much anything.

[greenskeeper]

In the years leading up to the 2008 crisis, who exactly gave homeowners the subprime loans, then proceeded to sell them to the large investment banks?

I’m reading The Big Short right now and my understanding is that lendors gave individuals loans that started off as fixed interest but then became floating, these loans were given to individuals without a thorough check of their income. They were then sold to investment banks and packaged into MBSs.

The government decided that everyone should be a home owner. For some that meant for the banks to come up with exotic loans such as ARMs, Interest-only, and my favorite NINJA loans (no income, job, or assets).

[Petunia 100]

In the years leading up to the 2008 crisis, who exactly gave homeowners the subprime loans, then proceeded to sell them to the large investment banks?

I’m reading The Big Short right now and my understanding is that lendors gave individuals loans that started off as fixed interest but then became floating, these loans were given to individuals without a thorough check of their income. They were then sold to investment banks and packaged into MBSs.

All sorts of lenders large and small issued the loans; many of them have since gone out of business. They would make the loan, promptly sell the loan to an investment bank, then use the capital to make another loan.

[disneysteve]

All sorts of lenders large and small issued the loans; many of them have since gone out of business. They would make the loan, promptly sell the loan to an investment bank, then use the capital to make another loan.

This was really the source of the problem. The lender was taking zero risk or responsibility. They were giving out insane loans to people who couldn't possibly pay them but the lender didn't care because they immediately sold the loan so it wasn't their problem when the buyer defaulted.

[sv2007]

This was really the source of the problem. The lender was taking zero risk or responsibility. They were giving out insane loans to people who couldn't possibly pay them but the lender didn't care because they immediately sold the loan so it wasn't their problem when the buyer defaulted.

That is just the surface.
Let's dig deeper.
Why would the others buy those loans?

[sv2007]

In the years leading up to the 2008 crisis, who exactly gave homeowners the subprime loans, then proceeded to sell them to the large investment banks?

I’m reading The Big Short right now and my understanding is that lendors gave individuals loans that started off as fixed interest but then became floating, these loans were given to individuals without a thorough check of their income. They were then sold to investment banks and packaged into MBSs.

ARMs (adjustable rate mortgages) have been around for a long time, way longer than whatever that lead up to 2008 crash. They aren't all bad, and it can save you money if the rates go down past refi costs (in fact, it can save you money even if the rates don't fall that much because ARM rates during hte fixed part is probably lower than traditional already).

During the crash, a lot of interest-only mortgages are used; good for speculators (as the house appreciate) who never planned to hold on the houses. Maybe not so good for the home owner if they don't understand what's coming.

After the crash, with tight mortgage is actually bad for all of us in a way. I always preferred more choices than fewer. But I guess it is a way to work with people who don't take the time out to read things.

As for packaging sub-primes, it is the only way to make them acceptable investments; paired with CDS (credit default swaps), many were marketed as AAA rated investments; thus open up to large pension funds.

Well, now we know they aren't really AAA, right? : )

[greenskeeper]

That is just the surface.
Let's dig deeper.
Why would the others buy those loans?

They were split up and repackaged as an AAA rated investment....because.....real estate always goes up in value.....right?!

[sv2007]

They were split up and repackaged as an AAA rated investment....because.....real estate always goes up in value.....right?!

They were never split up; rather they were bunched together. by themselves, they are not AAA rated, but paired up with CDS they were rated that although even at the time there were questions.

What caused the RE value to drop?

[Like2Plan]

They were never split up; rather they were bunched together. by themselves, they are not AAA rated, but paired up with CDS they were rated that although even at the time there were questions.

What caused the RE value to drop?

I thought that the subprime loans were cut into tranches and repackaged across many bonds with the theory being the risk was being spread out -- so Viola --crap subprime loans were rehabilitated to a AAA rating.

Here is a memorable clip from The Big Short:

https://m.youtube.com/watch?v=anSPG0TPf84

[sv2007]

I thought that the subprime loans were cut into tranches and repackaged across many bonds with the theory being the risk was being spread out -- so Viola --crap subprime loans were rehabilitated to a AAA rating.

Here is a memorable clip from The Big Short:

https://m.youtube.com/watch?v=anSPG0TPf84

The individual mortgages were never split; multiples were packaged together instead. Youtube gives no sound in my VM so I don't know what that clip is about, but the 2008 crash is well documented.

[DaveInPgh]

The individual mortgages were never split; multiples were packaged together instead. Youtube gives no sound in my VM so I don't know what that clip is about, but the 2008 crash is well documented.

Comcast cut your audio because you don't pay your bill

[sv2007]

Comcast cut your audio because you don't pay your bill

More like I didn't install the sound card driver; this VM is for internet surfing and I don't need sound for that.