Quote:
Originally posted by theis:
<BLOCKQUOTE>Originally posted by Rdysn5:
For any Americans or money maestros here - why do sub-prime mortgages in the states have such a massive effect on the global economy? I don't quite get, for example, why a few thousand poor joe smiths in houston, tx or a few poor carlos sanchez's in albuquerque, nm, can somehow contribute to a bank in Britain coming close to collapse.
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In simple terms:
American economy is booming, stupid mortgage lenders sell stupid poor people ridiculously large mortgages.
This mortgage then gets lumped in with thousands of other mortgages good and bad that get sold on to other financial institutions. These institutions just see that the overall debt package has a decent credit rating on it not that it actually has a small but significant amount which is going to be almost all irrecoverable.
Stupid poor people suddenly realize that their monthly salary is actually far below the price of their mortgage repayments. Get repossessed.
Big international bank which bought all this debt of the mortgage brokers suddenly realizes that it is sitting on top of billions of pounds worth of this debt which could all go tits up. Other banks suddenly get wary of who could be sitting on billions of pounds worth of bad debt. No one lends to each other due to a lack of trust. Northern Rock which is a huge mortgage provider and who does so by borrowing extensively cheaper else where is hit particuarly hard by this credit crunch. This then panics consumers and causes a bank run. </BLOCKQUOTE>
Actually, its not just the sub-primes that are getting foreclosed in the US. Those are just the biggest segment that are failing because of a lack of regulation/planning.
Also, fwiw - only somewhere around a third of the properties being foreclosed are causing families to be kicked out. A lot of this has to do with a speculative bubble (people buying multiple houses to flip them and developers building way too many subdivisions).
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