History has a way of providing perspective that puts things into focus for us. For instance, as the country prepared to ring in 2009, we were also trying to figure out what happened that led to the difficult year 2008 is now known for. What ignited the financial crisis? Keep reading as we approach this topic with perspective on our side.
Errant Banks
First up, mortgage lenders – such as Countrywide – began finding themselves on the wrong ends of investigations. Some began sinking faster than the Titanic and soon, the phrase “subprime mortgages” began making the rounds. Countrywide’s CEO Angelo Mozilo even found himself facing charges before finally buying out the SEC in exchange for not being charged with fraud and other crimes. It took millions of dollars, but he managed to pull it off.
With a fast reversal of home prices in the United States, no one could have known it would eventually lead to a global crisis that we’re still dealing with four years later. The housing boom was well underway during the first half of 2008, and had been for the previous five or six years. This kick started the home construction sector in 2001 and suddenly, everyone was getting rich. And everyone was finding themselves approved for a mortgage – even those with less than ideal credit. There are those who still cannot fathom how some folks were approved for 100% LTV (loan to value) mortgages. A 100% LTV means that the lender didn’t require a downpayment and approved the borrower for the total amount of the home price.
Lenders were happily approving “stated” loans – these are loans that had a borrower’s income and assets “stated” on the application and the mortgage lender never verifying employment or even whether or not these applicants had bank accounts. There were millions of risky loans made as the lenders knew they could sell them to investors. Soon, the meltdown would begin.
Housing prices began falling, the boom was soon declared a bust and with little warning, folks from mortgage companies to house construction companies began closing their doors, sending millions to the unemployment lines. Foreclosures began dotting the landscape in alarming numbers.
Bundled Mortgages
Because there were so many banks involved – each that would buy a bundle of mortgages, only to repackage them and sell them off to a bigger bank, the lack of ethics was bound to be included in those so-called bundles. They began losing billions of dollars. Soon, the rest of the world was falling suit; after all, the U.S. is a global leader.
The domino effect was in high gear and no one knew how to stop it. The value of houses dropped, as did the mortgage loans and investments that the banks were, pardon the pun, “banking” on. With that kind of damage, it’s only natural consumer confidence fell – and it fell fast.
The economy responded with lay offs, more foreclosures, a credit crunch that meant higher interest rates to what few loans and credit cards were being approved. Soon, the stock market annihilated 25% of household’s net worth and before long, the recession was being called the worst since the Great Depression.
Massive losses caused banks to tighten lending and the stock market to crash, sending the economy into a tailspin.
Today, even though the effects are still stirring the muddied water, the nation continues to pull out of the devastation – ideally, we’re collectively better and stronger for the hard learned lessons. Will it be enough?
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