Missed mortgage payment? bad debt? How a bad debt caused a crisis

That’s whats behind the worldwide sub-prime crisis, millions of people missing payments, albeit on loans that may have been mis-advised or even extortionate but it doesn’t gloss over the fact that one guy in Ohio who decides he’s not going to pay his mortgage any more is not an isolated event when its correlated with all the other homes in the state who also decided to do the same. When you put all of these loans together (this is a simplified view just to make the point) then the Bank of ‘Wherever’ will suffer because of it.

Eventually the securitization process will start to feel the pressure, securitisation is where banks take all of their loans and then they put them into a ‘book’ of loans. So (I’m going to do this blog in layman-speak) basically all of the pages that are mortgages are put together into a folder, this is called a ‘mortgage book’ and then a thing called ‘gap maturity’ is worked out by risk analysts and this will tell you how much cash flow you can expect …

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