Glamor Economics

Chapter 189

Chapter 23 Section 8 Is Wall Street Drunk——The Subprime Mortgage Crisis

In 2007, the US subprime mortgage crisis broke out.

In August 2007, American Housing Mortgage Investment Corporation, the tenth largest mortgage lender in the United States, filed for bankruptcy protection. On August 8, Bear Stearns, the fifth largest investment bank in the United States, announced the closure of two of its funds.

From the end of 2007 to the beginning of 2008, major banks such as Citigroup, Merrill Lynch, and UBS were hit hard by subprime loans.The US government and six major mortgage lenders have launched a "lifeline plan" to stabilize the situation.

In March 2008, Bear Stearns, one of the five largest investment banks in the United States, was on the verge of bankruptcy. In order to prevent other banks from being threatened, the Federal Reserve cut interest rates by 3 basis points.

From July to early September 2008, Fannie Mae and Freddie Mac were taken over by the government, Lehman Brothers went bankrupt, and Merrill Lynch was acquired by Bank of America.The greatest threat of the subprime mortgage crisis emerged.

After September 2008, Goldman Sachs, the largest investment bank in the United States, and Morgan Stanley, the second largest investment bank in the United States, released information on transformation. The five major investment banks disappeared completely, and the financial structure of Wall Street collapsed completely.

In October 2008, the U.S. Doyle Index fell below the 10-point mark and closed at 9955.5 points, a tragic drop of 369.9 points, while the highest intraday drop was close to 800 points.

In November 2008, the Wall Street stock market fell sharply, and the relevant stock indexes all fell by more than 11%.Especially on the 2th, the overall economic index of manufacturing in the New York area fell to the lowest level since 17.

2008年12月，美国出现了此次次贷危机中的最高跌幅，纽约股市标准普尔500指数下跌40.6%，仅次于1931年大恐慌时期的47.1%。2008年一年，美国市值“消失”高达7.3亿美元。

Along with a series of serial events such as economic downturn, job loss and income reduction, people feel that a new crisis has come around.To understand the ins and outs of this crisis, we must first understand what the "subprime mortgage crisis" is.

In the United States, most people advocate early consumption, especially in terms of housing. The system of buying houses with loans is a very good financial system.First of all, it requires the borrower to pay at least 20% of the down payment, which shows the responsibility of the lender; secondly, the total amount of the loan cannot exceed four times the annual income of the borrower, that is to say, for a family with an annual income of 4 yuan, the bank can at most Lend him 10 yuan to buy a house.This is the most basic financial product. This product enables many young couples who could not afford a house to own a house of their own, and at the same time activates the related economy.Under this system, both the lender and the bank are very clear about the responsibilities and risks: the borrower knows that if they fail to pay the monthly loan, they may lose the property and the 40% down payment; It will be closed by the government and its business qualification will be cancelled.Under the balance of responsibility and risk, social activities run smoothly.

But the problem is that not every American can qualify for a loan to buy a house.At this time, the Americans innovated the "subprime debt"."Subprime" and "prime" in the U.S. mortgage market are defined by the borrower's credit conditions.According to the level of credit, lending institutions treat borrowers differently, thus forming a two-level market.People with low credit cannot apply for preferential grades and can only seek loans in the secondary market.The service objects of the two levels of the market are home buyers with loans, but the loan interest rate in the secondary market is usually 2% to 3% higher than that of the preferential level loan.Subprime mortgages are popular in areas with high concentrations of minorities and underdeveloped economies because they lend to borrowers who discriminate against or do not meet the standards of the mortgage market.From this point of view, it should be said that the starting point of the US subprime mortgage loan is good, and in the first 10 years, the moderate issuance of this financial product has also achieved remarkable results. From 1994 to 2006, the home ownership rate in the United States increased from 64% to 69%. More than 900 million families owned their own houses, and a large part of the loans were subprime mortgages.

In 1980, the U.S. Congress passed the Deregulation of Depository Institutions and Currency Control Act to encourage mortgage institutions to issue mortgage loans to low-income families.The law abolishes the traditional upper limit on mortgage interest rates, allowing mortgage institutions to lend to low-income people at high interest rates and high rates to compensate for the lending risks of mortgage institutions.Minorities make up more than half of those who have used subprime mortgages to obtain housing, and most of them are low-income people with poor credit histories.Therefore, subprime mortgages are highly risky.Compared with the 6% to 8% interest rate of ordinary mortgage loans, the interest rate of subprime mortgages may be as high as 10% to 12%. In this way, borrowers with little money and poor credit bear high interest rates, and lenders with high interest rates bear high Risk, the former has a house to live in, and the latter makes a lot of money.

So, how did the subprime mortgage crisis come about?Subprime mortgages create a market for people who would otherwise not qualify for housing loans, so that people with insufficient credit or bad loan records can also take out loans.These subprime loans need to be applied through intermediary agencies, and intermediary agencies should have taken care of the first hurdle.However, in order to win more business, intermediary agencies began to violate regulations, make fakes, and provide fake data and fake income certificates.The bank sees that the applicant has a good credit history in the past, so they make loans to these applicants, and then the bank converts these loans into bonds, sells them to Freddie Mac and Fannie Mae, and Freddie Mac and Fannie Mae sell these Bonds are split into bonds with smaller face values ​​and sold to ordinary investors.

In this way, people who can’t even provide proof of income can take out loans, deceive the bank through the packaging of intermediaries, and the bank then sells the bonds to Freddie Mac and Fannie Mae, and Freddie Mac and Fannie Mae divide them into face value Smaller bonds are sold all over the world, including companies like AIG.Finally, one day, the borrowers of these subprime debts began to be unable to repay the interest. If the bank cannot get the interest, it cannot cash it to Freddie Mac and Fannie Mae. If Freddie Mac and Fannie Mae cannot get the money, they cannot give investors, triggering a series of economic crashes.

[links to related words]

Subprime Mortgages Refers to loans made by some lending institutions to borrowers with poor credit and low incomes.The difference from standard mortgage loans in the traditional sense is that subprime mortgage loans do not have high requirements on the credit history and repayment ability of the borrower, and the loan interest rate is correspondingly much higher than that of ordinary mortgage loans.Those who have been rejected by banks for prime mortgage loans due to poor credit history or weak repayment ability will apply for subprime mortgages to buy houses.

(End of this chapter)