Type Of Loan Mortgage Personal Investment: Fill & Download for Free

Peer-to-peer lending (or P2P lending) allows you to loan money directly to borrowers. It effectively cuts out the middleman – the bank or lending institution.The skills and procedures for starting each P2P lending site are outlined. The minimum investment required (which can amount to as little as $25) depends on the platform. You decide which borrowers to lend your money after you review the profiles of potential borrowers. A profile includes information on each loan, such as interest rate, the reason for the loan, the duration of the loan and risk evaluation (or grade) of the loan. This profile includes detailed information on each loan.Types of Peer-to-Peer LoansThere are a number of peer-to-peer loan types available. Here are a few of the types of loans you can expect to find through P2P lenders:Personal loansStudent loansAuto loansMortgagesBusiness LoansEach peer-to-peer lending platform specializes in certain types of loans. You won’t find all of these available through a single lender. Do your research and find out what kind of loans you wish to invest in before beginning.While relatively new, P2P offers individual investors an opportunity to participate in the lending process. Anyone other than large institutional investors has historically not been able to do so. As with every investment, before investing, you should consider carefully the risks and rewards. P2P loans are able to provide healthy returns if you decide to invest.Happy Lending :)

Ok. let’s start with our story to explore one of the biggest economic catastrophe in history, in a lay man’s language.Before we begin our story, let us define the characters of our story along with one key feature and function that defines our characters throughout the story.Common People: They deposit money in banks. They buy houses by taking loans from the banks. They are innocent.Banks : They provide loans to people and charge interest. They are greedyRich investors (Money Market): They have lot of money and always look for opportunities to invest money to earn big profits. They are profit seeking.Credit rating agencies: They basically give ratings, just as our film censor boards, to investment products. They are competitive and greedy. for ultra simplification:5 star rating→ best investment. Low risk1 star rating→ worst investment. Big riskFederal reserve: It is basically to regulate the financial system ensuring the preservation of interest of the common people who have deposited the money in banks and invested in other securities (like shares).Smart guys: They understand the fundamentals of economics and are very observant. They are greedy too.Now. Let us understand how the economy works domestically and how it is interconnected with the globe , step by step.A person want to buy a house for $100.He seeks loan from a bank. The bank gives him $100 on some interest rate, let’s say 5%. in return the person signs a piece of paper and gives it to the bank. Let us call this paper as a mortgage paper.What is a mortgage paper?A mortgage paper is basically a guarantee by the common man that hey will pay his loan + interest. If the person fails to pay his debts, the bank can confiscate his house , sell it and recover the outstanding amount.Let us see inside the Bank now. The bank has given loans to many common people. It has many mortgage paper with it. The bank now bundles all the mortgage papers depending on the quality of loans.What is a quality of loan?Highest quality bundle → people with good paying capacity. LOW chance of people not paying the debt (Low Defaulting)lowest quality bundle → People with poor paying capacity. HIGH chance of people NOT paying the debt.( High Defaulting)Who decides the quality of loans?For this we have our 3rd character, the Credit rating agencies.What does the credit rating agency do?It bundles the loan together as per their quality and gives them ratings. 5 star for highest quality loan. 1 star for lowest quality loan.The bundle after the rating is now called a “CDO”. leave the nomenclature, it is not important here.Why does the bank bundles the mortgage together?To sell it to rich investors.Why does the bank sell the bundles to rich investors?Let’s say the bank has 10 mortgage paper with $100 loans on each and 5% interest rate. consider the loan paying deadline to be one year. so the bank will have to wait for 1 year to get an amount of $100 X 10 + $5 X 10 = $1050.So, the bank bundles the mortgage and sends it to the credit rating agency. The ratings agency rates the loans as High quality and Low quality.The banks now, sells the bundle to the investor for a price. the price they charge is (loan amount+ a commission let say 2%). So the bank has gained $100 X 10+20=$1020 all at once, without waiting for a year, and thus saving a huge amount of time and resources.Why do the rich investor buy the bundle (CDO) ?Because the investors gets higher returns on their investments.He buys one bundle for 1020. with a guaranteed recovery of 1050. So he buys many such bundles, as he is rich and has a lot of money. The more bundles he buys, the more his profit.They buy these bundles from different banks and thus increasing their return on investment.How do they Buy the bundles (CDO)?They look for the star rating. they prefer buying 5 star rated bundles. ( Technically, the ratings are AAA for the best)Here is the summary of the entire process until now.So, now where did the problem begin? Hope you remember the characteristics and function of our characters.Greedy Bank: Since they were making upfront profits by selling the bundles (CDOs) to rich investors, they liked this idea. They started collecting more and more mortgage papers. All that the bankers cared was lending out as much loans as possible and disposing them off to rich investors and making quick profits.How do they collect more and more mortgage papers?By easing out their loan processes. verification of the people’s credit history, salary etc were all less of a priority now. Get as many people as possible to receive the loans.Schemes like NINJA loans (No Income No Job) hit the market.loans were given to migrants, people with low paying capacity etc which essentially increased the risk defaulting.So, now our banks have a lot of mortgage papers with itself to bundle together.Competitive and greedy rating agencies: Let say there are two famous and credible ratings agency in the market. M and S. the agencies charge a fee for examining the mortgage and providing it a rating. Now, as “M” see a lot of these bundles coming to it, and bank wanting best ratings possibles, the rating agency “M” didn’t want to loose such an opportunity to make huge profits to its competitor “S” . So it started giving the banks what they wanted. So, the bank wants high ratings on the bundle, Here it is. Thus, what was essentially happening:Low quality bundle were given 5 star rating : Let us call these low quality bundles as ‘Sub-prime mortgages’ . But, as i said, nomenclature not important here.Rich Investors: Since, all the bundles are now highly rated with low risk, the demand for such bundles increased.Now, let us understand the basic demand-supply economics at play here:Highly rated bundle → High demand by rich investor → higher value for such bundles→ more incentive for the banks to create more of such bundles → for more such bundles, the bank’s sough borrowers for housing loans→ more people can now buy homes→ greater demand for houses created→ homes are in limited supply→ the prices of houses go up→ house becomes a source of good investment as people can now buy houses via loans and sell them at higher prices due to its increasing prices→ buying of house becomes easy due to easy availability of loans→ Higher the prices of homes , more the value of loans→ more value of loans means more the value of the bundles → more lucrative the bundles become for our rich investors→ more the demand for such bundles.This sets the vicious economic cycle of Boom, marked by high growth and high inflation. The only problem is that this type of growth is not sustainable. Hence, it is also called a bubble. Here, the housing bubble.What is a bubble?A bubble is exactly what is sounds. something that is made of thin layer with nothing concrete to support its increasing shape for a long duration, except Air, and which thus it can pop any time.So, In economics, a bubble is when the prices of certain commodity rises based on speculation. people buy a certain product in the hope that the prices will increase in future and they can sell them at higher price any day. A wide number of people believe this, and start buying the product. this creates a great demand in the market for the product, this sentiment runs all across the market and more and more people want to buy this product.When and How does a Bubble pop?Now, when some people realize that the product they are buying is actually not worthy of the current value attached to it. The current value is quite higher than the true value. we call it “over-valued”, the investor start selling the product in large quantity to make profit before anyone else realizes this. Now, when there is a huge supply of the product in the market, its value decreases. as people see the price decreasing, majority panic and start panic selling the product. more supply in the market, lower the value of the product and this sets the vicious cycle for a bubble burst or an economic crash.How did the housing bubble Pop?Now, remember that many of the bundles were loaded with mortgages with high risk of defaulting by the borrowers. So, now came the time. The prices of house were sky rocketing. It eventually became impossible for borrowers to pay back the loans. Here two things happened.Borrowers started defaulting: So, the risky bundle rated “5 star” now started loosing its value as there were not much recovery.People started selling their house: now, again, with large number of people selling their house, the supply of houses increases and thus the value started decreasing. As the value of houses started to decrease, so did the value of the bundle. (since the bundle is nothing but a collection of mortgage on these houses)So you see, the prices of houses started to fall drastically due to panic selling, as is the case with any bubble.What about the smart guy character in our story?Now, a few people actually went through the highly rated bundle one by one and checked whether the loans were actually low risk as stated by the ratings agency. they did the background checks on the borrowers. they sensed the reality behind such huge increase in prices and took advantage of the situation.Smart guys started betting against the bundles. What does this mean?So, the bundle that our banks and investors hold, i want to buy an insurance against these bundles. So, in event when these loose their value, the banks will have to pay me the insured amount. Until then, i pay the monthly/yearly premium on the insurance to the bank. This is just like any other insurance product. The only difference was, the smart guys knew for sure that these bundles are going to fail and the banks will have to pay them the insured amount. Let us call this insurance product as a “credit default swap”. But, as i said Nomenclature doesn’t matter.So, what happened when the bubble burst?Rich investors: They were loosing a huge sum of money on their investment as the bundles they held were of no value and no returns. A few investors were on the verge of bankruptcy.The banks : They were under huge payment obligation for the insured bundles which were failing drastically. The payment obligation were so high that they many were on the verge of bankruptcy.What happens when banks and investors are on the verge of bankruptcy?Since, the banks and investors are listed on stock market, the news of bankruptcy causes their reputation and thus their stock to fall drastically, creating another blow to them.Bank’s bankruptcy essentially means it has failed. Now, since the bank is made of the money from the people in terms of deposits, it means huge loss to the people.How does this affect the common people?The entire financial world, including banks, investors etc are made up of money from the people all over the world. So, these financial institutions failing implies the common people loose their money, their insurances, Investments, social security and ultimately their job. This creates huge unemployment.The entire business world runs majorly on private investment. So the failing of financial firms (rich investors and banks) affects other core businesses due to loss of investment.This means loss of jobs in all other inter-linked sectors of the economic supply chain.So, the economic cycle of bust sets in. This is called a recession.Now, comes the federal reserve:Fed says: The financial firms cannot fail for a long period of time. So, how do they recover? they need money. From where does this money come from? Let the people of the world, pool in and give the required amount to make these firms stand again. Or instead, there is already a pool of people’s money in the form of Tax collection by the US govt, let’s use this money. Let us Bail-Out these banks and investors. They are too-Big to fail.Who is the ultimate looser:The Banks?NO, They are bailed out. No criminal or financial fraud proceedings against them. They conduct the business as usual.The Rich investors?NO, They are bailed out too.The Smart guys?NO, They made huge profit on the insurance claims for the failed bundles. They are praised for the “prediction” of the crisis.The Credit ratings agency?NO, Let’s just tighten the norms so that they don’t do this next time. But, who knows?The people?YES, the immigrants, the working class, the middle class.EDIT: Answers/my views on few relevant question from the Comment section:Q.1) How did the smart guys buy an insurance over the product they don’t own?Ans: Consider this, I own a car. I have the insurance on car and in case the car gets damaged, the insurance company will pay me. This is our simple world. Now, let’s take this car into the world of capital market (Where these Bonds, mortgages are traded). Here, I have full faith on my driving skills. You some how come to know that the right wheel of my car is going to burst after a few weeks and you want to capitalize on this. You come to me and say that you want to buy an insurance against my car. I wonder over the proposal. I am sure that i can never get my car into an accident. So i think you are a fool, digging your own grave, so i want to capitalize on this too. Hence i introduce a special paper which i will call “CAR ACCIDENT SWAP”. In case the car gets into accident, I will pay you. So, it is a kind of reverse insurance. Here, the owner of the asset is confident enough and based on this confident, he sells insurance , and not buy insurance. Hope this makes it clear now.Q.2) This answer seems to be a summary of the movie “The Big short” (2015)Ans: I would rather say that the movie “The big short” is the summary of the 2008 crisis. Any explanation of an historical phenomenon will always have the same content. Take for example The story of India’s freedom struggle. If two movies are made on this event, Does it mean that the movie release later is a summary of the movie released before? I do accept that i have seen the movie ‘big short’, i’ve read many articles on the topic. Had many discussion with my friends, and also in my economics class, on this topic. In fact one of my GD topic for a placement interview was 2008 crisis. So, It is difficult and also unfair to list these as sources unless there is a direct co-relation with the way my answer is written and the movie is presented. I hope you understand.Q.3 ) How does one make money from a potentially seeming bitcoin bubble, just like the smart guys did in 2008?My Views: One cannot buy a swap instrument as bitcoin does not trade on the Wall street (or any stock market ). But As the popular learning from the event of California’s Gold rush 1848–1855 goes. The people who benefited the most from the gold rush were not the people digging for gold, but the people selling shovels. So, Sell shovels i.e bitcoin/cryptocurrency exchanges are making the most out of the bitcoin rush. So, hire a developer, get an investor on-board and make the most of it.

This is an excellent question that people really need to know more about.When we solve a problem, after a while, we tend to forget what solved the problem and go back to what we used to do that caused the thing to go over the cliff in the first place.That was the 2008 mortgage and financial crisis, as it forgot the lessons of the Great Depression.History up to the Great DepressionIn the 1920’s, when the economy was booming and it seemed like the party would never stop, banks lent out a ton of money on credit, with the presumption that all that money would be paid back and that there was sufficient collateral to cover it.Except, there wasn’t.One of the biggest assets that people might own that a bank could recover is real property. As Will Rogers once noted: “Buy land. They ain’t makin’ any more of the stuff.” Real property was something that pretty much always appreciated in value.Prior to the early 1900’s, most people didn’t own their own homes. Most people rented. Many lived in tenements and apartments in cities, or lived as tenants on farms in rural areas. Land speculators often bought what was left of the government land grants as the frontier closed.But, in the 1920’s, that began to change as banks felt more confident in lending credit for new construction. There were significant speculation bubbles. People bought property and built homes on future credit that wasn’t based on anything but hope.And as the stock market ticked ever higher and higher, banks bet on it. With the deposit money of their customers.And then the Stock Market Crash of 1929 hit.Banks that were significantly overleveraged and undercapitalized were hit hard. Many just failed, and those who had their deposits at banks that became insolvent just lost everything. There was no deposit insurance. If your bank went under, you were screwed out of your entire savings.And if you lost your job, that meant you also lost any means of continuing to pay back that home loan.Additionally, there were suddenly vast quantities of new construction for sale… that nobody could afford any longer. That drove down property values everywhere.Suddenly, your property that was worth $10,000 last year might now only be worth $5,000. But you might still owe $8,000 - what we call “underwater.” If you default or declare bankruptcy, the bank loses. And you’re out on the street.And then, what could the bank do with the house? How could they sell it? Nobody was buying. So, the bank suddenly has a ton of illiquid assets.More foreclosures in a neighborhood continues to lower the property values further, and the destructive cycle just ends up repeating itself.The Hoover administration tried economic protectionism. At the administration’s pushing, Congress passed the Smoot-Hawley Act of 1930, which imposed schedules of high tariffs on over twenty thousand types of imported goods, to protect American business, by golly.It backfired spectacularly and greatly exacerbated the worsening Depression.Weather conditions didn’t help. A severe drought ravaged the Midwest and Great Plains starting in 1930. Farmers had been using what in retrospect were poor farming practices, tearing down line fences and forest windbreaks and not planting cover crops for winters. The thin layer of good topsoil in the Great Plains turned to dust and became an ecological nightmare.Farms started going under as crops failed. The Smoot-Hawley tariffs only made things worse.Additionally, the money supply dried up. The banks that survived, like J.P. Morgan Chase, just turned off the credit spigot to stay afloat. They stopped lending. Why? Again: illiquid assets. The banks were holding on to all these properties and other assets that they couldn’t sell. And people didn’t trust the banks because so many had lost everything depositing their savings there. Because the banks couldn’t sell anything they had, and nobody would give them any cash, they didn’t have any money to give out.Part of the problem was the gold standard. Under the Federal Reserve Act, at least 40% of the money in circulation had to be backed by gold reserves held by the federal government. So, there was no modern tool of being able to print more money to help increase liquidity.On top of that, gold became more expensive. Mortgages often had clauses that allowed banks to demand repayment in gold because of the gold standard. By 1932, that resulted in a disparity in payment between the dollar and the value of gold that meant that if a debtor was forced to repay in gold, it could cost him as much as $1.69 for every dollar he owed. This led to more bankruptcies and foreclosures still.Because of the tariffs, the lack of money supply, the collapse of agriculture, and lack of consumer spending, rampant deflation initially set in. This made exported American goods increasingly more expensive for overseas importers, even where other nations had not instituted retaliatory tariffs of their own. Manufacturing began to collapse. The steel industry followed.And the Depression spiraled out of control.When Roosevelt took over from Hoover in 1932, the nation was becoming increasingly desperate.The New DealRoosevelt ran on a radical new idea that he called “The New Deal.” The premise was that the government would intervene in the economy and prop it up through deficit spending and government borrowing. The New Deal would create government programs to put people back to work and get people back to farming and building things, and that eventually, once people got back on their feet, the government could take those supports out.Various New Deal reforms were leveled at the financial sector to try to get the credit flowing again.One reform was put on the banks directly: the Glass-Steagall Act. One of the problems with the banking crisis was that banks could gamble with depositor’s money. The Glass-Steagall Act separated investment banks from commercial banks. Investment banks are gamblers. These deal with stock and bonds and venture capital and hedge funds and Wall Street. Commercial banks are the Savings and Loan where you put your nest egg. The Glass Steagall Act put a firewall between the two. The idea was that Wall Street could melt to the ground and Main Street wouldn’t go with it.Keep this in mind. It will be important later.Another was to protect depositors. Commercial banks would be required to pay into a new Federal Deposit Insurance Corporation: the FDIC, which would make sure that depositors would get paid back if the bank collapsed. That encouraged people to trust banks again. People would deposit their money, and banks could use that money to start giving out loans again.A third was to help reduce the risk of default on certain types of loans through surety agreements. Sureties had been around forever: they’re a promise to pay a debt if the original debtor defaults.The Federal government aimed these programs at home loans in particular, to try to reduce the homelessness problem. And so, in 1938 with the National Housing Act, the government formed the Federal National Mortgage Association, or FNMA. FNMA, or “Fannie Mae,” would buy the mortgages from the banks, who would continue to “service” the mortgages. From the perspective of the consumer, it looked just like their ordinary transaction: get a loan from the bank, pay the bank. The bank kept some money for “service fees,” and the Feds took over the loan, and importantly: the risk of default. This created a secondary market for mortgages for the first time in history.But Fannie would only buy that mortgage if it met certain criteria, such as debt to income ratios, term of the loan, and more. If banks wanted to make other loans, that was fine, but Fannie wouldn’t buy them.And the program basically worked. Banks started lending again. Credit slowly started to thaw out. Banks started getting more liquidity in their balance sheets. People started being able to buy homes again.After World War II, the housing market took off again, fueled in part by the GI Bill and a push for suburbanization and the creation of easily duplicated, cheap ranch houses on a standardized template.But in the background still driving things along was always Fannie Mae and the prime 30 year fixed-rate mortgage, which had become as much a part of the standardized American experience as baseball. Housing prices rose steadily home ownership became a stable part of the American economy. Virtually every person in the country could see a viable path to owning their own home.By the 1960’s, FNMA owned more than 90% of the residential mortgages in the United States and individual home ownership had risen to the highest levels ever recorded. This led to the greatest expansion of the middle class in history.So, of course, like all wildly successful government programs, we had to fix it.PrivatizationIn 1954, FNMA was semi-privatized into a public-private hybrid where the government owned the preferred stock (with better voting rights within the corporation,) and the public held the common stock (which gave dividends, but inferior voting rights).And in 1968, Fannie Mae was privatized entirely, with a small slice of it (known as Ginnie Mae) carved off to maintain Federal Housing Authority loans, Veterans Administration loans, and Farmer’s Home Administration mortgage insurance. Because Fannie Mae had a near monopoly on the secondary mortgage market, the government created the Federal Home Loan Mortgage Corporation to compete with it: Freddie Mac.By 1981, Fannie and Freddie were doing well as private companies, and Fannie came up with a great idea that had been done in limited settings: pass-through mortgage derivatives. They would bundle up various mortgages and sell them as a type of bond to investors. Investors loved the idea. The housing market had been extremely stable for nearly fifty years and offered a modest, but highly reliable return. And so the commercial home loan mortgage backed security was born.Keep this in mind. It will be important later.The Savings and Loan CrisisBy the early 1980’s, the economy had been stable for 30 years (more or less,) and thanks to the Glass-Steagall Act, commercial banks were doing okay even with the “stagflation” of the 1970’s. Home prices continued to rise about on par with wage growth.But one type of commercial banks, the Savings and Loan banks, wanted to do better than okay. S&L’s were the kind of bank in It’s a Wonderful Life. S&L’s were specifically singled out in federal legislation, like credit unions, for a single purpose: to promote and facilitate home ownership, small businesses, car loans, that sort of stuff.A business-friendly Congress agreed. They passed two laws in 1980 (signed by Jimmy Carter) and 1982 (Signed by Ronald Reagan) that allowed banks to offer a variety of new savings and lending options, including the Adjustable Rate Mortgage, and dramatically reduced the oversight of these banks.Adjustable rate mortgages work by locking in a fixed rate for a short term, and then after that initial term, the mortgage rate would re-adjust every additional term after that. If the prime interest rates set by the Federal Reserve stayed high, lenders would get hammered.But S&L’s had a fix in mind for consumers: just keep refinancing your home every time the first term is up. Home prices would just always continue to rise, right? They could collect closing costs every couple of years, and consumers remained essentially chained to them in debt with a steady stream of revenue that would always be secured if something happened. It was perfect.Keep these types of mortgages in mind. It will be important later.By the mid-1980’s, the lack of oversight allowed S&L’s to start making riskier and riskier decisions, offering certificates of deposit with wild interest rates, as much as eight to ten percent. They were exempted from FDIC oversight, while still keeping deposits federally insured (what could go wrong there, right?)And then the Federal Reserve, in an effort to reduce inflation, raised short-term interest rates, which sent ripple effects through these S&L’s, who had been made very vulnerable to that particular issue through these bad decisions, lack of appropriate capitalization, and overpromising depositors.By 1992, almost a third of savings and loan banks nationwide had collapsed.This crisis led to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which put back some of the same oversights that had been taken off because people wanted to make more money, particularly better capitalization rules (which were tied to risk,) increased deposit insurance premiums and brought back some FDIC oversight, and reduced these banks’ portfolio caps in non-residential mortgages.Keep this in mind. It will be important later.The Repeal of Glass-SteagallRemember how back in the 30’s, in the midst of the Great Depression, we instituted that firewall between investment banks and commercial banks?Again, it worked so well, we had to fix it.Starting in the 1960’s, the federal regulators began to start to allow commercial banks to get back into the securities game again. The list was limited, and was supposed to stay in relatively safe stuff.This accelerated under Reagan’s policy of deregulation, and continued under Clinton in the 1990’s. By 1999, Bill Clinton declared that Glass-Steagall no longer served any meaningful purpose, and most people had declared it dead well before that. The law was officially repealed in 1999 with the Gramm-Leach-Bliley Act.Immediately, investment and commercial banks start merging again. Bear Stearns, Lehman Brothers, Citibank, all of these investment banks start buying out the commercial banks or merging.And there’s a culture difference between those.Remember: investment banks are gamblers. These are the Wall Street guys. They’re risk takers. They’re hedge fund managers. These are your Gordon Gekko type guys. Commercial banks are Main Street guys. They’re generally conservative, George Bailey types.And the investment banker culture won out over the course of the 2000’s. George Bailey starts snorting coke and putting on Ray Bans with a blazer and jeans.Sub-Prime, NINJA, and ARM LoansIn the early 1990’s, affordable housing started to become a greater and greater issue. George H.W. Bush signed legislation in late 1992 amending Fannie and Freddie’s charters to push them to make loans to people with lesser means than the traditional prime criteria. The Clinton Administration continued pushing Fannie and Freddie to accept more low and moderate income earners.That meant taking on riskier loans.The Clinton administration put rules in place in 2000 to curb predatory lending practices, and rules that disallowed those risky loans from counting towards their low-income targets.The Bush administration took those predatory lending rules off in 2004, and allowed those risky, “sub-prime” mortgages to count towards the low-income targets set by Housing and Urban Development.Remember those ARM mortgages?Heh, heh. This is getting long, and you probably glossed over that, didn’t you? I told you it was going to be important.Banks started making riskier and riskier loans, often those ARM loans. They could meet their HUD targets and make tons of money. And again: the gravy train was endless, right? The housing market had not lost value for over fifty years, even in the recessions of the 70’s and 80’s.So, they put more people in houses. Bigger houses. More expensive houses. The economy was doing good. New construction was hot. Contractors couldn’t build the McMansions fast enough.Banks started a race to the bottom with these sub-prime loans, getting all the way to NINJA loans: No Income, No Job, No Assets required. You’re a homeless person selling Etsy products out of your car? You’re already prequalified on a quarter-million subdivision home with a quarter-acre. Congratulations.As long as you could afford the payments, you were in.De-regulationIn the early 2000’s, the Bush administration wanted to keep the economy going. There was a low-level recession from March 2001 to November 2001 following the dot-com crash. The administration lifted a number of securities and financial sector oversight rules. One of those rules was about capitalization.Remember that? I told you that was going to be important.Capitalization requirements are how much reserve cash a bank needs to keep on hand to prevent collapse if something happens, against their liability sheets. Remember: that’s how banks got in trouble before the Great Depression and again right before the Savings and Loan Crisis. They took on too many liabilities and didn’t have enough capital to actually pay it all out.The Bush administration relaxed the rules on required capitalization and what assets could count as capital. Some of those assets turned out not to be very useful.Collateralized Debt Obligations and the Mortgage Backed SecurityRemember, back in 1981, when Fannie starts issuing those mortgage backed securities, re-selling them as bonds with a low, but reliable interest rate?That gets more complicated after 2004–2005 with the increased use of a financial tool called the collateralized debt obligation. Basically, a CDO is just a promise to pay investors in a sequence based on the cash flow from something the CDO invests in. The rate of return was tied to how risky the CDO was.In the 70’s and 80’s, CDOs were pretty safe, mundane things. They were basically like index funds; they invested in a lot of stuff and did okay. But by the mid-2000’s, CDOs were becoming riskier and riskier, while providing more and more reward. CDOs bought up mortgages like crazy, because they had increasingly higher interest rates as the subprime mortgages started taking off.But people were nervous about investing solely in these high-risk CDOs. And so, investment banks that bought up those mortgage-backed securities started to bundle together some high-risk mortgages with some regular, low-risk mortgages and promising that they were safer.And then some investment banks started to lie about how many of those high-risk mortgages were in them. Why? Again: the housing market was super-stable and always going up. Those loans only looked high-risk on paper, right? I mean, those debtors could always just keep refinancing every couple of years.So banks bought up those assets and added them to their capitalization sheets.You see it, right? You see the problem here? Not yet?Keep this in mind. It will be important in just a minute.The CollapseI remember being in college in the early 2000’s, and asking the loan officer at our local bank how some of the people I knew were making maybe $10–12 an hour could afford these massive homes and boats and jet skis and campers. My parents were teachers; they weren’t doing bad, but we couldn’t afford all that and I knew they were doing better than some of those people. The loan officer shook his head and said, “They can’t. They can afford the payments.”Some of those people didn’t have furniture in their homes. If they had a party, they rented furniture for a couple days. I’m serious. That was a thing. Many of them were in deep, crippling credit card debt, paying off the balances of one with another, and justifying it with the idea that it would be okay when the next raise kicked in.It was a classic speculation bubble.Then in late 2006–2007, that bubble burst.The housing market became oversupplied. People stopped buying the new construction and the existing homes as much. And home values started to drop.And suddenly, because home values plateaued and then dropped, so too did the little bit of equity that many of these purchasers, in debt up to their eyeballs, had in their homes. Without more equity, they couldn’t refinance. And because they could’t refinance, those ARM loans or other loans kicked in, and the interest rates on them skyrocketed.And suddenly, they couldn’t make the payments anymore.And then they went into default on their mortgages.Followed by foreclosure.And often bankruptcy.It turned into a vicious cycle. Once one or two neighbors end up losing their homes in foreclosure, it affects the property values of everyone else around those properties like a contagion. Healthier borrowers started to become impacted as property values declined and now they couldn’t refinance.In 2007, lenders foreclosed on 79% more homes than in 2006: 1.3 million foreclosures. In 2008, this skyrocketed another 81% still: 2.3 million. By August of 2008, nearly one in ten mortgages nationally were in default and foreclosure proceedings. By one year later, this had risen to over 14% nationally.The RecessionRemember, the financial sector had heavily invested in all of those housing market securities. They thought they were safe. They thought that the housing market would never go anywhere but up. They built their whole foundation on it.And they had relied on those securities to meet their capitalization requirements.Securities that suddenly turned out to be nearly worthless.Huge banks ran out of liquid cash almost immediately. This is what happened to Bear Stearns, Lehman Brothers, Goldman Sachs, Citibank, and more. They were suddenly holding on to billions upon billions of dollars of assets that were either worthless, or completely frozen. They couldn’t sell the bits of stuff that was even worth anything.And because their assets weren’t liquid, they didn’t have money to lend anymore.And that lack of credit is what grinds the economy to a halt.That impacted every sector of business in the United States. Which impacted every sector of business in the world. And that meant that businesses started having to lay people off because they couldn’t get the money to keep paying them.And then because those people lost their jobs, they started to default on their mortgages. Which rippled through the CDO market again.This was why it was so critical for the Federal Reserve to buy those toxic assets and provide the banks with liquid cash in their place. They had to get the credit flowing again to re-start the gears of the economy. Without it, we almost certainly would have seen a full repeat of the Great Depression.And that brings us to today.That’s the abbreviated, oversimplified explanation. It’s more complicated than this, and there’s other factors that contributed, but that’s kind of the main story in basic terms. That’s roughly how 10 million homes went into foreclosure.And we still haven’t fully recovered. Over twice as many people rent as opposed to own. Less than one-third of people who have lost a home in foreclosure in the last decade will be able to repurchase another again. Roughly 2/3ds of those people who lost their homes have so damaged their credit that they will never qualify again. Hundreds of thousands, if not millions more, were so emotionally traumatized by the experience that they simply refuse to go through it again.And that number of renters to owners is substantially higher for my generation, the Millenials, who have never seen any substantial portion of the post-2008 recovery. We still haven’t made up the wages that would allow us to save enough to purchase, even setting aside the massive increase in student debt we carry.75% of my generation wants to own a home. Less than 35% do.And, in case reading this wasn’t chilling enough for you, the present administration has been lifting some of the exact rules and regulations that were put into place after the 2008 collapse that were lifted in 2004 that were put in place after the 1980’s collapse after those were lifted. Because it worked so well the first two times.Mostly Standard Addendum and Disclaimer: read this before you comment.I welcome rational, reasoned debate on the merits with reliable, credible sources.But coming on here and calling me names, pissing and moaning about how biased I am, et cetera and BNBR violation and so forth, will result in a swift one-way frogmarch out the airlock. Doing the same to others will result in the same treatment.Essentially, act like an adult and don’t be a dick about it.Look, this is pretty oversimplified. Ph.D. theses have been written about this. I’m trying to make it at least remotely accessible to those with the patience to read it. Don’t be pedantic about it, please?Getting cute with me about my commenting rules and how my answer doesn’t follow my rules and blah, blah, whine, blah is getting old. Stay on topic or you’ll get to watch the debate from the outside.Same with whining about these rules and something something free speech and censorship.If you want to argue and you’re not sure how to not be a dick about it, just post a picture of a cute baby animal instead, all right? Your displeasure and disagreement will be duly noted. Pinkie swear.If you have to consider whether or not you’re over the line, the answer is most likely yes. I’ll just delete your comment and probably block you, and frankly, I won’t lose a minute of sleep over it.Debate responsibly.