# market crisis - what exactly caused it?



## z106 (25 Sep 2007)

Excuse my ignorance but what started all this turmoil in the matrkets?

I do know that the financial institutions that bought all these packaged mortgages that included sub prime borrowers are left with the debt and no one knows how much  debts everyone else is holding hence the credit crunch.

My question is why have all these subprime borrowers started defaulting now?
Is it because the rising interest rates in the states eventually took their toll on people just recently?
And if so - has the fed not been criticised for not preventing this by not raising interest rates so high so fast as opposed to trying to repair the damage by seriously cutting interest rates last week after the horse has already bolted from teh stable ?

Or is my understanding not quite right?


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## jpd (25 Sep 2007)

Some of the sub-prime loans were at very low interest rates for the first 12,18 or 24 months and then the rate was increased. This was then compounded by the Fed raising rates. Sometimes the interest was not fully covered by the initial payments but also rolled up into the loan until the grace period was over.

I suspect that a lot of the borrowers had no idea what the were getting into but were lured by talk like - "Sure how can you lose with house prices going up by 15-20% per annun. If you get into a problem just sell the house, repay the loan and pocket the difference"

Unfortunately, the houses prices stopped going up and are now falling hard and fast.


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## Sunny (25 Sep 2007)

jpd said:


> Some of the sub-prime loans were at very low interest rates for the first 12,18 or 24 months and then the rate was increased. This was then compounded by the Fed raising rates. Sometimes the interest was not fully covered by the initial payments but also rolled up into the loan until the grace period was over.
> 
> I suspect that a lot of the borrowers had no idea what the were getting into but were lured by talk like - "Sure how can you lose with house prices going up by 15-20% per annun. If you get into a problem just sell the house, repay the loan and pocket the difference"
> 
> Unfortunately, the houses prices stopped going up and are now falling hard and fast.


 
Exactly right. Rising interest rates and falling house prices together with very lax underwriting standards mean the defaut rates on these mortgages are much higher than expected. It is especially the case for mortgages done in 2006.


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## MichaelDes (25 Sep 2007)

Sunny said:


> Exactly right. Rising interest rates and falling house prices together with very lax underwriting standards mean the defaut rates on these mortgages are much higher than expected. It is especially the case for mortgages done in 2006.


 
Further rot will spread as many fixed rate mortgages in the US and Europe will soon mature, leaving many exposed to default with higher rates to pay. It is not over yet - there is still a lot of mileage to go.


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## DerKaiser (1 Oct 2007)

I though the majority of US mortgages were fixed for life?


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## Thomas22 (1 Oct 2007)

DerKaiser said:


> I though the majority of US mortgages were fixed for life?



Most have 12-18 month teaser rates which then reset to a much higher market rate.


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## command (1 Oct 2007)

The teaser rates were crazy. Sub prime mortgage applicants were getting 120% mortgages, no money down with repayments of maybe $850 for two years and then when the introductory rate ended the repayments had gone up to $1,500. 

These are people who could barely afford the $850 they were paying so the new repayment was just so far beyond them they had to default. 

Subprime rates in the UK have gone over 10% for some borrowers who are coming off low introductory rates. Its going to hurt them and hurt them bad. 

They had a poor credit rating to begin with so in their minds what differrence does it make to them if they have another default loan.


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## roland (3 Oct 2007)

command said:


> The teaser rates were crazy. Sub prime mortgage applicants were getting 120% mortgages, no money down with repayments of maybe $850 for two years and then when the introductory rate ended the repayments had gone up to $1,500.
> 
> These are people who could barely afford the $850 they were paying so the new repayment was just so far beyond them they had to default.
> 
> ...


 
I read about one case where a 70 year guy with very little income was given a 120% mortgage.  He used the 20% to pay the mortgage repayments until the 20% ran out.  With little income, it was no surprise that he then defaulted.  Crazy stuff.


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## MichaelDes (4 Oct 2007)

A short answer to your question....Alan Greenspan.


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## The Viking (9 Oct 2007)

the poor borrower is getting a bad rap. 

sup-prime borrowers did not all gang up together and decide to take down the system, Sub prime lenders designed these products so that they could be resold / repackaged in the secondary market and make money twice. As usual, the banks have done a great job putting out a spin to blame the poor borrowers


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## Sunny (9 Oct 2007)

The Viking said:


> the poor borrower is getting a bad rap.
> 
> sup-prime borrowers did not all gang up together and decide to take down the system, Sub prime lenders designed these products so that they could be resold / repackaged in the secondary market and make money twice. As usual, the banks have done a great job putting out a spin to blame the poor borrowers


 
I don't think people are blaming the borrowers (well not entirely anyway). I think they are trying to point out that they shouldn't have been given mortgages in the first place. Most mortgages are repackaged and sold on whether they are prime or sub-prime. There is absolutely nothing wrong with this.


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