What Caused the Mortgage Crisis?
By Kurt O'Keefe, Detroit Consumer Attorney on Apr 15, 2009 in Mortgage Issues
Greed.
How did greed play out?
Crisis of Credit Visualized is a great video by Jonathan Jarvis, over three quarters of a million hits so far.
Sub-prime mortgages, securitized trusts, credit default swaps, collateralized debt obligations, mortgage brokers, investment bankers, credit freeze, it is all there.
Mortgage brokers got paid a commission at closing, does not affect them if that mortgage is not paid.
Even the mortgage company flips it after closing, selling the mortgage to someone else, making the quick buck.
In less than 12 minutes, not everything can be explained.
The video leaves out how the mortgage industry pushing of ARMs made things worse.
Millions of Americans were given mortgages with ARM teaser rates, that is, adjustable rate mortgages that started with a rate below what the terms of the mortgage required.
This is how it works. Or used to work.
The terms of your ARM are that you pay a premium, say 3%, over some base rate, say, LIBOR.
That stands for London Inter-Bank Overnight Rate.
As the name indicates, that rate changes daily.
So, you are borrowing money, and agree to repay at three percent over whatever this LIBOR is on a particular date, say, every six months after you sign the papers.
So, on the day you sign, LIBOR is 5.5%, plus 3%, you have an 8.5% rate.
No one tells you that; no one tells you what the monthly payment would be at that rate.
Nope. They give you a teaser rate, say, 4.5%, good for, oh, two years.
After that, the 3% plus LIBOR kicks in.
If you happen to read throuh the fine print, and get past what everyone is telling you, you might ask about this.
“No problem!” they all say.
Home values only go up. Interest rates are always low now. So, just make all your payments on time, and before the two years is up, refinance! Hey, you might even get a better teaser rate then, and, for sure, you can get even more money out of your house, an even bigger mortgage!”
And lots of people were able to do that. Rates stayed low, home values went up, they re-financed, and got even more money out to spend.
It worked great, until it didn’t work anymore.
All of a sudden, home values did not rise, they plummeted. Interest rates went up a little. Lending standards tightened. The snowball started to roll downhill, and now it is an avalanche.
Check out the video for short, easy to follow explanation of how we got where we are.
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