How Do American Mortgages Work? Part 9: The Financial Crisis

What caused the Housing Bubble in the United States during the early 200s? Experts’ continuous debate on what the root of the cause is but Fannie Mae and Freddie Mac have less to do with it than you think. Fannie and Freddie backed about half of all the home-loan originations in 2002 but a new market for mortgage-backed securities were arising. Loan originators backed by Wall Street were straying away from selling the loans to Fannie and Freddie but creating their own mortgage backed securities with high-risk subprime mortgages. These would include something called a hybrid adjustable-rate mortgages with balloon payments which are nearly impossible to sustain without refinancing. It left Fannie and Freddie only backing up around 30% of the loans in 2005 and 2006.

The big players of Wall Street like Lehman Brothers and Bear Stearns would package the subprime loans into securities. The credit-rating agency would then rate them falsely-high so they can sell to investors who were unaware of the actual health of the security. Everyone saw how the housing prices were rising and didn’t see …

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The banking 'Whitewash'

Meredith Whitney talks about the ‘banking whitewash’, saying that the recent gains in many banks (they have been beating expectations by and large in Q1) are not all down to ‘recovery’ but instead due to other factors.

She says that the factors that lead to these gains are not replicable and that the underlying assets are still deteriorating. This makes for some interesting observation because the great deleveraging of both companies and individuals is still in full swing so there is little reason to doubt the observations Meredith Whitney makes, rather it will be how these factors play into the real economy that concern me.

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The banking ‘Whitewash’

Meredith Whitney talks about the ‘banking whitewash’, saying that the recent gains in many banks (they have been beating expectations by and large in Q1) are not all down to ‘recovery’ but instead due to other factors.

She says that the factors that lead to these gains are not replicable and that the underlying assets are still deteriorating. This makes for some interesting observation because the great deleveraging of both companies and individuals is still in full swing so there is little reason to doubt the observations Meredith Whitney makes, rather it will be how these factors play into the real economy that concern me.

Read More