Going Once, Going Twice... Gone

The big news today from me is that our family just bought a new house. It was quite a surprise as it was from an auction, that's right, a house auction. This transaction brought the grimness of the housing market right into my face.

The house was bought by the owner in 2004 around 400K. We bought the house in 2008 with a grand total of 400K, meaning that the housing market never increased. How did this happen?


The Credit Crisis for Dummies

(Note: The source for this is from This American Life)

Somewhere out there, there is a huge pile of money asking to be spent. That pile of money is from all the savings in the world, such as the national bank. Then there are the people who controls that money. The math genius, the psychologist, the economist, the geniuses of the financial market. All those people want to make that pile of money grow.

Traditionally, the pile of money got invested into safe stuff such as government bonds but from the period of 2000 to 2004 (?) the pool of money almost doubled, but safe investments didn't. That poses a major problem for those geniuses.

Also, Alan Greenspan during that time announced that the Fed interest rate will stay at a miserable 1%. That's when mortgages paying 5% started to look real nice. Immediately, those men and women controlling the pool of money turned to Wall Street people who traded mortgages.

But where did those Wall Street investors get those mortgages? They got it from small, local banks, which then sold it up to mortgages aggregates who then sold it up to such banks as Morgan-Stanley and Bearstearns. As the number of eligible borrowers started to dwindle, the banks started to become creative. Such exotic loans such as SIVA (State Income Verified Asset), SISA (State Income State Asset), NIVA (No Income Verified Asset), and finally a NINA loan (No Income No Assets). Basically that means I could technically go up to a bank and ask for a loan for a home.

How did the geniuses of the finiancial market fool themselve into this mess? The reason is because the loans were never created before. All the data in the world are old, unapplicable data, thus all their computer simulations are off. But every analysts used the simulations, which said that the loans should be good, with default rates of at most 10-12 percent.

So those large banks who bought those mortgages from the small banks packaged the loans they got and sold them to the pool of money. As the pool of money gets more hungry for those loans, the quality continues to go down, but everybody doesn't think so because of old computer data. The perfect example of data over commom sense gone wrong.

Then as the mortgages started to default, as the house prices started to get way too high, as the geniuses suddenly got common sense hammered into their heads, the high flying market dropped. All those mortgage packages suddenly lost their value as the global pool of money lost...

Now they love bonds again.

-runiteking1

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