The Sub-prime loan market was not the cause for our current market woes. We've heard the blame put on those who bought more home than they could afford as a simplistic reason.
- Many vilify those individuals who through mortgage and real estate professionals were encouraged to finance using many creative mortgage products.
The mortgage industry kept rolling out attractive loans and offers to snag anyone who wanted to own a home. The end result was that people purchased homes with adjustable rate mortgages, thinking appreciation would put them in a position to refinance in 3-5 years. The refinance would avoid the reset of the adjustable rate.
- Other attractive mortgages like the 80/20 combo or the 90/10 combo were frequently used. Those loans were coupled with seller assist, which resulted in little or no money out of pocket from the buyer. The standards for acquiring a loan allowed "no doc" or "stated income" were extremely low.
- A dangerous recipe, but not enough to sway our market coast to coast.
In actuality, this was a very small portion of the mortgage market. The Sub-Prime mortgage market only represented 1.2 Trillion which was not enough to cause the total collapse we have experienced.
In a recent article the National Bureau of Economic Research identified that the cause for the housing recession was just plain old bank panic. The real culprit was the little known Renew Sale and Repurchase (REPO) process.
- Its a difficult concept since we assume bank assets or deposits are insured. This facet of the banking industry is not.
To understand how this portion of the banking industry collapsed please read the full article Subprime Mortgages and the real estate recession.