This is part 2 of this post.
So what we have here is the banks are writing loans with little regard as to whether or not people can afford to actually pay the loan, securitizing and selling the paper to investors as quickly as possible, all with little accountability or oversight.
In the middle of all this, the Fed lowered the prime rate from 6.5% to 1.0% in the wake of the 9-11 attacks and the financial recession that followed.
This was a situation ripe for disaster. The banks were selling loans as quickly as they could in a feeding frenzy of subprime lending. Every major bank had a subprime lending department. This wasn’t just in mortgages and real property. This was in credit cards as well. As credit became easier to get, more people got credit. The financial boom that began in the mid-90s was a result. Housing prices skyrocketed- nationwide they increased by 124% in just 10 years. In some real estate markets, the rise was MUCH higher. The Fed had to raise rates to compensate. This cause the Adjustable Mortgage Rates to climb, and many of the people with ARMs that they could barely afford to pay at the lower rate began to default when the increasing rates and payments pushed them over the edge.
The house of cards and paper began to collapse in mid-2007. As home loans began defaulting, the insurance companies providing mortgage insurance were among the first to go. Insurance giant AIG fell in September of 2008. Fannie and Freddie Mac went during the same month. By this point, bankruptcy filings had doubled, foreclosures were increasing, and housing prices had fallen 20%. Interest rates began to climb as some banks began to struggle.
As an example, the Middle District of Florida saw about 15,000 bankruptcy filings in 2006. In 2007 that had risen to about 26,000 and in 2008, it rose to 42,500. In 2009, there were nearly 63,000 bankruptcy filings, all in one Federal district. 2010 isn’t shaping up to be any better. The first two months of the year have already seen 9,500 filings.
The government has responded to all of this by borrowing more money and dumping it into the economy. Over $4 trillion since 2006, and half of that has been in the last year. The banks made money by making loans that should not have been made. Then they were ‘bailed out’ by other banks who used funds supplied by our government, and those banks are being funded by more government dollars, and are making even more money by foreclosing on homes that they cannot even prove they own the paper on, and meanwhile the American Public is paying the tab- twice. Once in taxes, and again in losing their savings and their homes.
We as a nation are responding to a crisis that was caused by too much borrowing and spending by borrowing and spending even more. We are essentially paying our Visa with our Mastercard. I fear that we have not seen the end of this financial crisis.
To be continued…