A Recent Headline in a Term Paper

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"Forecasts by Moody's Economy.com now use a 20 percent drop in median
existing-home prices from their 2005 peak as a baseline, with prices
weakening through at least mid-2009" (Shinkle, 2008, p. 44). Moody's
director of housing economics Celia Chen, states in the same report that
the 20% decline is the good news and that the bad news is that it could
easily be more than that. The worst-case scenario is a lot more than that.
"You want the darkest? Forty percent, she says. There's your apocalypse"
(Shinkle, p. 45).
Websites that track foreclosures indicate that "the US-wide total of
loans foreclosing was running at 2.5 million in 2007, up by 70% from about
1.5 million in 2006" (Dumas, 2008, p. 23). The problem is that the teaser
rates that were initially set in 2006 will reach their peak in 2008,
ultimately affecting another approximate 1.5 million mortgages, with
another round in 2009. The spring 2009 cumulative total of over 4 million
foreclosures is a reasonable expectation. "At roughly $200,000 per
defaulting household, the total of mortgages going under could be $800
billion" (Dumas, p. 24).
Many people are asking the same question of 'how did this all
happen?' The finger pointing is just beginning and it is being pointed at
Wall Street for creating the investment vehicles, the bankers for being
willing to make the loans, the underwriters for rating the investments so
highly, and even the individuals who purchased the properties and then
defaulted on the loans. According to one investment guru, "it all started
with low interest rates, which made homes affordable for more people"
(Altfest, 2008, p. 24).

Altfest states that lenders were much more willing to make loans in
the subprime market because they had an outlet to rid themselves of those
loans once they had been made. That outlet was Wall Street who had created
the REMIC's, CDO's and CMO's and were more than willing to purchase the
loans for placement in those investment vehicles.
The problem came about when "thousands of buyers who normally wouldn't
have been able to get a mortgage on their own were able to realize the
American Dream" (Altfest, p. 24) but these borrowers with questionable
credit eventually began to default on the loans and "many mortgage
companies found themselves in serious financial trouble, stuck with loans
they couldn't sell to private investors or other lenders" (Altfest, p. 24).
With property prices falling and no one to sell them to, the glut in the
housing market affected the builders who were no longer able to build
houses that would sell. The oversupply of houses on the market hit a 16-
year high in July 2007 and there continues to be a huge number of unsold
houses on the market today.
As if to add insult to injury, many insurance companies are raising
their rates on the very same consumers who are in danger of losing their
homes, or are already in foreclosure. Insurance companies often run credit
checks on individuals requesting insurance but base the premiums being
charged on how good (or bad) the individual's credit is. This is causing
some angst in Washington and the practice may 'reignite insurance scoring
battles in state legislatures and in Congress" (Gusman, 2008, p. 12).

According to Gusman, some consumer groups expect lawmakers to
aggressively look again at the rating factors used by insurance companies
to determine premiums. "With millions seeing their credit standing
threatened and many at risk of foreclosure, penalizing them further with
higher insurance rates would be unfair, these groups contend" (Gusman, p.
13).
Some experts are saying that, as with every financial crisis, this too
will work itself out. However, one expert says "this is different from,
say, the Internet bubble because the financial industry needs our help
(taxpayers' help, that is)" (Regnier, p. 138). The bursting of the
internet bubble was different in other ways as well. The internet bubble
was brought about in a similar manner to many of the other financial crisis
suffered by Wall Street. That is that many investors bought into the hype
of a particular industry and bought up the common stock of the companies in
that industry. The various stocks were not created by Wall Street and
touted as safe, fixed-income investments as CDO's and similar investments
were. As Regnier put it; "over-exposed Wall Streeters are having a crisis
of confidence" (p. 138) and when investors lose confidence in their brokers
the immediate response is often to pull their money from any and all
investments.

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That type of response is what leads to volatility in the
marketplace, and a general downturn in value. This downturn does not
affect only stocks and bonds, but all types of investments, including the
underlying securities or security used to back loans, etc.

As one investment guru recently stated; "as a value-oriented investor,
I'm salivating over the prospect of eventually purchasing distressed real
estate for both current income (through rents) and potential long-term
gains (through sales)" (Altfest, p. 24). Of course, Altfest is not buying
yet, he would prefer to wait until the dust has settled. He said, "over
the next few years, I'll also look to buy more shares of homebuilders, like
Toll Brothers, Pulte Homes, and Lennar, but only after their prices fall to
half or less of their book value per share" (Altfest, p. 24).
Other firms and industries are feeling the pain as well. Since
builders are not building as many homes, suppliers are not selling as much
product as was previously being sold. Workers are being let go which only
exacerbates the problem, especially if the worker is one of the borrowers
who has purchased a home with relatively little creditworthiness. A recent
article stated what is happening in the financial world in the following
manner; "One domino toppling the next. It's been a convenient metaphor for
how troubles in the American subprime mortgage market have cascaded into a
global financial mess" (Mullins, 2008, p. 42).
Whenever an event, or series of events, such as these take place,
there are always those individuals who will attempt to manipulate
circumstances so that they will benefit from the fallout. Many times these
individuals are politicians who wish to be seen as doing something
productive to help their constituents.

"In the case of the subprime debacle, the political pendulum was in
full swing before any practical understanding was fully developed as to
[lie facts surrounding the origination of tie related loans and which
homeowners were in need of, or otherwise deserving of, assistance" (Pardes,
2008, p. 119). It did not matter if the politicians recognized what was
necessary or even prudent, they wanted to be seen as 'take charge'
individuals and therefore proposed a number of measures they felt would be
helpful. Some of those proposals included; "freezes in interest rates,
bankruptcy reform a moratorium on foreclosures or a taxpayer bailout"
(Pardes, p. 120).
According to Pardes one politician even called for a creation for a
new agency similar to the Resolution Trust Corporation (RTC) that was
formed during the savings and loan crisis. Many of these attempts to
control the situation were taken by American officials, while worried
bankers, lenders and investment officials in other countries kept a close
watch on what was taking place in America. The foreign stock markets are
all closely tied to what happens on the American exchanges and this fallout
from this financial crisis would effect many more firms and industries than
any other crisis had ever done.
Along with the advantages touted by numerous so-called experts
concerning the global economy now come the disadvantages as well. With so
much information now at the individual's fingertips, the question of why no
one seemed to notice what was happening comes to mind.

This is especially true since by "September to October 2005 the
worsening of affordability reached the stage of stopping the rise in house
prices actually transacted -- that is, the median prices of new home sales
and existing home sales. The most comprehensive measure of US house prices
leveled off then but managed another 2% increase before its peak in June
2006" (Dumas, p. 23).
The financial industry is a mess and no one wishes to take the blame,
or even to figure out what went wrong, how to correct it, and how to
prevent it from happening again. It is easy for the pundits to point
fingers but few of them had the financial savvy to warn of impending
disaster. One of the so-called experts laments the fact that he did not
realize what was happening writing, "an article on why home prices could
not go up forever and the possible consequences of a reversal in prices
would have been simple to present, but it could have changed the course of
people's lives" (Bernstein, 2008, p. 1). No matter.....

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