How did the sub-prime mortgage meltdown happen?

[cliffy]

Can someone explain how the sub-prime mortgage meltdown happened?

[Brad456]

banks gave out loans to people who did not have to prove they can afford the house.the banks collected their fees and then sold the loans to other institutional investors. who got stuck holding the bag,when many of the home buyers found that they could not afford to keep paying for the house, and started to default on the loans.banks colluded with property appraisers to inflate cost of the homes, then used predatory lending practices to convince people that they can afford the house. then set them up with mortgages that made it seem affordable for the first few years, after which it becomes increasingly difficult to pay the mortgages.

[krism]

Two parts to this question.

First, easy lending standards. Allowing people to qualify who could not make the mortgage payments. This was done a few ways. Qualifying people based on shaky financial background. Qualifying people based on paying mortgage of the teaser or discount rates, rather then the normal rates that the mortgage carries during the rest of the loans term. When the rates adjust, the people can no longer make the payments and the mortgage defaults.

Secondly, Sub-prime loans made by loan providers were packaged into bonds and sold to investors. These mortgage backed bonds have guarantees, such as the number of loan defaults, before the bonds must be bought back by the issuer. Since many loans went into default, the bonds were repurchased by their issuers. But then the problem is how to value these assets, since there is no way to know how many loan defaults were occur, and how much of the initial investment is recoverable. The issuers of the bond cannot report what their assets are reliably, since they cannot value these assets.

Major banks and other Wall Street investment houses stopped providing money, or being able to get money from other sources to continue business.

Thus Credit Meltdown