Mortgages were made easier to get by allowing lending houses like countrywide greater access to the market and keeping the Fed rates extremely low. The derivative market while partially to blame more because of poor oversight and false grading of mortgage bundles was not the driving factor behind the melt down. Slow downs in the market causing employers to cut hours and jobs took people living paycheck to paycheck over the cliff into default on mortgages that they had no business receiving in the first place. People leveraged on their homes in excess of 100% value because of home equity prior to the deflating of home prices bailed on mortgages rather than pay them. The short sell and the default became regular occurrences driving the number of junk lending instruments in play to catastrophic numbers. We are still bailing out Fannie and Freddie from all the junk debt instruments they were forced to buy to keep the toilet from flushing. Huge debt run up by irresponsible consumers, over inflated housing prices, and credit to easy to get were the cause for the melt down. Now that the banks are tightening up, things should ease to a more stable position eventually but in order to keep the economy running Washington, not the Fed, needs to do something about the high unemployment rates aside from looking astonished and saying they miscalculated.

Archangel, I don't knnow who appointed you expert, but your post is full of half truths and conclusory statements.

The article does does contain enough information to comment.

Break to "money for nothing, and the chips (blue) for free. Took since the last depression to get here. I think there one and the same. my pappa warned me this would happen. he grew up in the last one, I guess I'll die in this one.....................Oh yeah, he passed 16 years ago. can't trust those future talkers....

People can blame the financial institutions all they like. They certainly did grease the skids and are unscrupulous swine, but ultimately, the home buyers are the ones to blame for the bubble and the collapse.

The only reason why the cost of homes ballooned several years ago was because people were stupidly paying those exorbitant prices. It was akin to a dealership asking $50,000 for a Chevy Aveo, and people actually buying them for that insane price. Generalized comments here, but forget about buying more house than they could afford, they were flat out paying way more than the house was even worth. Common sense should have taken over at some point, but unfortunately it didn't. There's a lot of stupid people in this country who ended up ruining the whole market for sensible people looking to buy sensibly priced houses with mortgages within their means.

So I blame the buyers most of all. Without them, none of this would be possible.

Richard- it was intentional...to destroy the US private economy. Most people had THEIR wealth in their homes...destroy

the housing market and all else falls...especially with the 2 prong attack on jobs. YES THE GOVT HEADS CAUSED IT AND

ARE CONTINUING TO CAUSE THE TOTAL DESTRUCTION OF OUR ECONOMY..WELL PLANNED BY THE APHIDS OF POWER.

With the international bankers and the FED...it is checkmate. Balloon the debt and there is no hope. We are well beyond the point of no return...we are heading over the waterfall and more rapidly by the day.

Bankers were only trying to get this crappy debt off their books, which is why all of this happened. The Banks didn't want these loans, the new types of loans were proposed by the Clinton administration as part of their push to extend home ownership to low income people. Furthermore, the administration strong-armed the banks into making these loans. Finally,m to top it off Clinton's administration made $500k from selling your home tax deductible which encouraged speculation. Blame needs to be put at the root cause - even Congress knew it was all Clinton's fault & formally laid the blame at his feet. Unfortunately, people don't take the time to learn things for themselves so all of what really happened has been lost.

Well if the dems had not pushed for EVERYBODY to get a house, even if you have lousy credit and had to take and arm loan, which was the only way you could get the credit for the loan. Years ago a friend of mine who is a real estate agent, told me that the 2/28 and 3/ 27 arm loans were going to blow. First because the interest rates could go up to 16% and probably would. second the people getting the houses on those loans new their credit was in a mess, and were going to live good once in their lives. So if you got a bankrupcy it comes off your credit when you die. any other default takes 7 years minimum, 10 years in some states to come off your credit. I believe nearly everyone knows that. I dont buy into the dream that the people who bought the $200,000 houses on arm loans thought they could get their credit straightened out in 2 or 3 years and then would get a 30 year fixed note. I just cant believe that all the people who have now lost their houses just did not know. That and the dems pushed fannie and freddy to give the loans, so the idiot lawyers in washington did not see this coming. Dont see that either. The republicans McCain and Bush attempted to get a bill pushed thru prior to this to get some regulation on fannie and freddy and it was shot down by the dems. otoh, If it was so important why did Bush and McCain not fight harder. Probably had a deal going with Obama to turn the US into a socialist country. Makes about as much sense as anything else I have heard, such as NOBODY KNEW! I know one thing i quit drinkin way too soon.

There seems to be endless finger pointing as to where the blame lies in the housing collapse. From my viewpoint it was the greedy bankers and investment bankers that created the CDO derivitives. Yes, the borrowers and gov't were also culpable. My logic:

For decades there were reasonable lending/borrowing requirements - i.e. 20% of selling price down and you could borrow UP TO 28% of your gross income for a house payment and when including other consumer credit payments (like a car payment and credit card payment) the lenders would allow the total to be UP TO 36% of your income. From the mid 1960s until around 2000, housing prices rose along with general inflation and wages (about 400% over the 35 yrs). Mortgages were sold into the secondary market, increasing the lenders liquidity to keep the real estate market rolling - but with reasonably stable lending/borrowing requirements.

A key point is to understand that Banks book the overwhelming majority of the profit on the loans at the time they make the loan - not over the life of the loan. There are servicing fees of course to whoever services the loan, but the majority of the profit for the loan is reported when the loan is made. So the more loans a bank (or mortgage lender) can make - the more profit they made, increasing their stock price etc. Because for decades lending standards were rigourous the lenders in essesence had a limit to how many loans they could make. Here is where the trouble started.....

Lo and behold the ingenius investment bankers - they created the CDO and related derivitives. Slice/dice and package a group of mortgages, get them rated "investment grade" and sell them to unsuspecting buyers looking for a higher return than treasuries. Of course they would skim off a small percentage for their efforts. Like the banks and mortgage lenders, the more they sold the more profit they made.

The only problem was everybody that wanted a house and that could qualify for a loan had one. the only way to increase volume was to reduce lending standards. Now enter the government folks with their never ending desire to help every american to grab the american dream - home ownership. This took the form of encouraging a reduction of lending standards. First it was only 10% down, then 5% down and toward the end 0% down. Couple that with the elimination of proof of income (no doc loans) and now the volume of borrowers REALLY skyrocketed. Everybody loved that. More people could afford homes, builders had record housing starts, hard consumer goods sales exploded to fill the houses with things, lenders enjoyed record profits, homeowners felt rich from rising prices (from the increased demand), borrowed and spent the rising equity, governments (fed, state and local) all saw revenues surge. In essence, free money for everybody - and who doesn't like that. In the end the bubble burst - and if everyone wasn't so greedy maybe more of many players would have realized it had to end badly. Every time I saw a zero money down, no closing cost loan advertised on TV, I said to myself, "this is crazy", but for whatever reason I couldn't force myself to act defensively - as I too hoped it would go on forever.

I am convinced that the bubble would not have occured - to then burst - if the following happened:

1. Lenders did not reduce lending standards such that the amount borrowed became out of sync with incomes. When real estate prices are linked to incomes they can not explode precipitously higher.

2. If the government didn't implicitly encourage reduction of standards and ignore common sense regulation, they would have seen that lending leverage of 30 -35 times is just plain stupid. At 33 times the lenders only had 3% equity in the game. How is that much better than a zero down loan? Stupid.

3. If CDOs and other derivitives were not created or dishonestly sold - there would not have been as much pressure to orignate and increase the volume of loans - which fueled the astronomical profits of the banks, mortgage lenders and investment banks.

Some were involved - but ones I don't blame as much - like the powerful real estate industry (estimated to be 15% of the economy). Builders are like squirles burying nuts -- it is simply what they do. Give them money to build and they will build things. To the extent that many large builders jumped on the lending bandwagon, they too were culpable.

And lastly, contrary to many folks that blame the poor lying schlumps that took out mortgages they could not afford - I want to but can not bring myself to blame them. Why do these dummies avoid my wrath you ask? It is because I have concluded that faced with the carnival barkers inviting you into the circus tent - to buy a house with ZERO down and no closing costs, and you don't even have to (prove you) have a job - who among you would not get in the line to say "lets give it a try". Yes many borrowers were stupid, but in the end I hold the lenders, investment bankers, and lax regulators responsible.

In the final analysis no one will take the blame, because in today's environment it seems no one ever takes the blame for anything. My take on things is done and I'm off to sit on my deck, get drunk, turn up the music and enjoy nature. Have a good life.

Looking forward: The economic pain will not abate until the deflationary pressures on the economy due to the housing market renormalizing iteself for the irregularities discussed in the previous 10000 messages. If the fed and Washington focused monetary and fiscal policy to effectively speed the housing situation, the rest of the economy will follow.

We are paying now for twenty years of an absurd skewing of a huge sector of our economy. And the pain it hs inflicted will continue for a few more years. Unemployment will not appreciably improve, and the economic prosperity to folow, will not occur until all the external aborrations inflicted in the housing market are flushed, and the number of mortgages that are in default, and the number of available homes for sale on the market return to normal.

Get information on how to reduce your debt by filing for bankruptcy http://bit.ly/cpmRHo

When I was a kid, we use to play: Rock, Paper, Scissors. Every kid new the rules, child's play. All the Fed and the Investment Houses have to do, is create more paper. In this game, everybody loses.

Does no one remember that there was a housing bust that started back in the mid to late 1980's and led to the Savings and Loan crisis and the founding of the Resolution Trust Corp by the government in 1989? It got so bad that you could buy a 3 bed/2 bath upscale condo in parts of the country for about $5,000.00. This was under Bush Sr.'s watch. Instead of banks making the bad loans, it was the Savings and Loan companies. Remember Home Federal, Imperial Savings & Loan, Silverado in Colorado that was connected to the Bush family and all the other Savings and Loans that failed? Today, Savings and Loans no longer exist. They were doing the same type of lending that the banks and mortgage companies did in the late 1990's -2000's (ARMS, balloon payment loans and the worst of the bunch, the negative amortization loan).

I've always believed one should live beneath their means. Buy less car than on can afford. Buy less house than one can afford. (paid for mine in 10 years). Smaller house meant less property taxes! (who's not in favor of less property taxes) Smaller house meant less space to heat and cool, which translate's into less money owed to the utilities (also translates into less taxes on utility bills). But when you buy, buy good quality so that it will last. All of this left me more money to invest in my 401, retirement account where I only invested in mutual funds that had a long term growth record (did not chase any flash in the pan ones). In my fifties I read an investment book called "The Millionare Next Door". It advised that one should do exactly what I was already doing. Talk about positive reinforcement of one's beliefs.

Hey Joe..... you and I must've attended the same class called "Act Your Wage 101.")

I find it strange that public schools don't have a mandatory class...simple economics. People go out in the real world and have no earthly idea how to live within their means. Is this on purpose?

DUH! Ya think???? People fell for the "you gotta buy a house before it's too expensive" ploy brought to you by the national real estate. Speculators also drove up the housing prices along with the flippers. It was a fear driven ploy to get people who couldnt otherwise be approved to buy a home to do so especially when the goverment deregulated the lending guide lines. And it just goes from there. The bad loans were bought by investers hoping to make more money on their returns. Ive seen this since the 70's.

Beev,

I like the title of the class you attended "Act Your Wage 101". Any school, whether public or private should have a simple economics course which teaches budgeting, the effect of compound interest upon their savings, and long term cost analysis of things they may want to buy among others. Less expensive now, is not always less expensive in the long run!

What of the culpability of the smart-growth crowd in creating the problem? We know from the law of supply and demand that limiting supply drives up prices. In areas were growth restrictions were in place, there were huge increases to the price of homes. The Federal Reserve has visibility to the number of contracts being traded (in this case mortgages). Higher priced homes coupled with increases in the number of transactions led the Fed to add liquidity to the system.

The Case-Shiller (sp?) price index for homes shows that not all areas of the country saw the huge run-up in home prices. For example, from 2000 to 2006 the index for Dallas went up at about the same rate as the CPI, which was about 23%. In other places, such as Miami, the price index went up over 260%. The difference between Texas and Florida is that communities in Texas more freely issued building permits than did communities in Florida.

Capitalism is a system of strong private property rights coupled with the rule of law. One of the tenets of capitalism is that all financial instruments must be tied to real property (see Hernando de Soto). The mortgage derivatives are financial instruments tied to other financial instruments, not financial instruments tied to real property. When the Fed removed liquidity from the system the whole house of cards fell.

In conclusion, I blame the anti-growth people, the banks that issued derivatives, the Fed, whose policies are not ruled by law, and the loosened lending standards forced on the mortgage industry by the government. Long-live Texas!

Sorry for the length but really need a common sense approach to the problem.

There are multiple causes for the collapse of housing. The bottom line is that people who had mortgages did not have enough money to pay the bank or mortgage holder. Many people think that the Arms, MBSs, and alike were the ultimate cause.

An example: When a person has chest pain and shortness of breath, we think the patient is having a heart attack. These same symptoms can be caused by hyperventilation. You have to look at the root cause of the problem. Sometimes, a true heart attack can cause anxiety and thus lead to hyperventilation thus compounding the diagnosis. The root of the problem has to be determined whether it is a heart problem or a pulmonary/nervous problem.

Many people bought houses beyond their means not taking into account a change in interest rates, i.e. Arms, balloon payments, etc. I am by no means defending the buyers or mortgage backers that pushed these products on home buyers. Almost no one ever reads the fine print of mortgage papers, if one did before signing, you would be at the title company for a day or more.

In the 1990s, the Clinton Administration wanted to extend home ownership and passed laws to assist the lower income people to obtain mortgages for a home. ACORN was a sponsor for many of these people and would encourage banks to lend to lower income people. The country had just come out of a recent recession in the early 1990s and interest rates were low considering the rates of the early 1980s when mortgage rates were 18% or thereabouts. The high interest rates of the late 70s and early 80s were the work of Paul Volker, then the Federal Reserve Chairman, who is now Pres. Obama's chairman of his economic council.

The recession of 2001 was preceeded by the attacks of 9/11. People were scared and the economy slowed. Mr. Greenspan lowered the Funds rate to 1% to encourage people to spend and keep the recession brief. This drop in interest rates while well intended allowed more lower income people to purchase homes. This also allowed move up buyers to buy larger more expensive homes.

When a bank reviews your income and tries to determine your ability to repay your loan, they consider many things and it generally accepted that your mortgage payment should never exceed 40% of your income. Why is that? Does it take 60% of your income to survive your daily living expenses such as food, clothing, schools, raising children and leisure activities? Probably a little more than 60% depending on your criteria.

We all know that food prices vary, sometimes by seasons. Clothing can vary due to the trends that people migrate too. Colleges are constantly raising tuition and books also never seem to take a price break. Most of these are also linked in some way to Energy Costs. Food for example, oranges may double in price if there is a heavy frost in Florida during the growing season. Energy however is often controlled not only by supply and demand but also the weather and speculators. Recently the SEC fined a firm for pushing the price of oil over $100.00 prematurely in the mid 2000s.

What were you paying for a gallon of gas after the 9/11 attacks? How about $1.05-$1.15 depending on your state's tax on gas. Oil never went above $40 a barrel until 2004, the same time that we invaded Iraq. The world became jittery. Speculators jumped in. Oil continued to $147 a barrel which translated into $4.00 a gallon for gas. You had now a 400% increase in energy costs. Even oranges don't get that bad. There is nothing that we consume that does not require energy. Energy is a necessity.

When you have a explosive rise in energy costs, the daily living expenses can often not be adjusted accordingly. Hopefully the CPI would encourage your employers to provide a COLA. I forgot. During the Clinton Administration, the CPI was changed as his administration believed that the CPI calculations over stated the true cost of living. Saved them money on Soc Sec Colas.

When people have less money, they buy less discretionary items. Thus companies produce less and lay off workers. Mortgage companies make less loans and lay off workers. Real Estate agents can't sell houses and find other part time work. Local companies decide to move their facilities to areas less costly to produce their products. Layoffs increase and more mortgages go unpaid.

The mortgage payment is the largest payment each month. The best and easist one to extend with the hope of catching up someday. However the banks and Wall Street decided that they could increase their revenue through the use of MBSs, CDOs etc. Smart move to increase the bottom line and their stock price. However they did not realize that daily living expenses would cause such a problem. Then to really top things off, Wall Street sold these "A" rated investments to Countries, Cities, etc overseas and thus we had the making of a world wide crisis.

If you wish to look at the crisis graphically, go to economagic.com and plot the Prime Rate and the price of West Texas Intermediate oil from 1940 to present using a GIF Chart. Add the recessions in and the grids. You will see that even a small rise in oil back in the 50s would cause a recession as the prices continued to rise.

Last note, Mr. Volker in the 70s and 80s often rose interest rates to combat inflation, often due to energy prices and why now does he speak a different tune when the same things occur?

I am amazed at all the unsupported speculation and opinion above. Not one poster has done the research it takes to understand what happened and why.

I'll give a few hints: Credit Default Swaps. Phil Gramm's 262 word amendment 2000. Pure "can't lose" gambling.

OMG...this video is SO funny!  ...and SO sad.

In 2006 I visited my nephew in Atalanta, who was a houing developer. At that time he had built and sold about 30 houses over the last 2 years and had 5 under construction. All of these houses were built on spec, (build and then sell) like everybody else was doing at the time. I asked him if he thought this was a little risky and he said it would be a long time before the market was going to slow down. It wasn't 30 minutes later he was on the phone flogging his 3 real estate agents to get people into the finished houses any way they could, or there would be consequences. Multiply this by a few thousand and you can see how a lot unqualified people were put into houses - destin to fail but everyone else got their profit and fees immediatly by putting the morgtage in a credit default swap. When the crash came he was left with 6 unfinished or unsold $700,000 houses. He went under, of course.

He was just a small player in a gigantic speculative market. This same scenareo played out thousands of time across the country in just a few months. They just ran out of buyers and prices had to start going down. When this started, the hedged securities behind them strated getting upside down and with no further liquidity comong into the market AIG and others had to pay off, which they couldn't because everything went south at the same time. CRASH. Lots of the economy in all those unsold houses, and the ones people were shoehorned into, but couldn't pay for, most of it in virtualy fraudulent dirivitives, which we can now see are very fragil and create a "fake" economy of non-existant assets.

The reason this had such a dramatic impact is because house building is practicaly the last manufacturing industry in the US, one of the few that can't be exported, and now that it has tanked we have nothing little manufacturing to fall back on like in previous recessions. The export of manufacturing to other contries has left us vulnerable and "re-tooling" is going to be long and difficult.

MM - At some time in the next three years, our creditors, the European investors and China will decide to invest less in the U.S and when they exit, we could reach the end of our credit limit.  The bond and stock markets will dive and we will see interest rates rise to double digits.  Our government will take in less taxes and will resort to big tax increases. 

Sorry Charls, I posted before I read your post - looks like we're on the same wavelength here.

It makes sense when you finally realize that the mortgage brokers referring and lenders making the real estate loans were nothing but sales people that would normally be selling shoes, used cars, washing machines and vacuum cleaners at Sears. These so called real estate pros had no clue on how to qualify a buyer for a home purchase.