Didn’t these INSTRUMENTS come into play because were trying to hedge their risky loans that the gov’t was forcing them to make??
“Didn’t these INSTRUMENTS come into play because were trying to hedge their risky loans that the gov’t was forcing them to make??”
It’s a snow-ball effect, I’m afraid ie government mandates were definitely a factor. The loans by themselves aren’t resulting in high foreclosure rates.
“The total foreclosure losses are currently less than 1% of the value of outstanding mortgages, which is far less than the market losses caused by the disruption of the credit markets.”
Read this:
http://www.geoffweathersby.com/wordpress/?p=20
As noted is not a matter of too many units being built, either.
“The demand for new homes collapsed after the MBS market declined, freezing the availability of a substantial proportion of the capital for home loans. The builders, and ultimately their employees, investors and lenders have all been impacted by the flawed MBS instruments and the paralysis of the financial markets these faulty instruments have created.”
Lets look at these MBS:
“we need to be clear about why the flawed MBS instruments failed:....
# The typical MBS instruments do not segregate individual mortgages into individual units of each tranche. This led to the unenforceability of the underlying security as previously discussed. It also led to the lack of information about the presence of impaired loans in any specific unit of each tranche of the MBS instruments.
# The incomplete information about impaired loans led investors to significantly undervalue each unit of tranches of MBS instruments. The market value of MBS securities has fallen 30 – 50% (or more) even though the overall mortgage foreclosure rate has resulted in losses of less than 1% of the value of outstanding mortgages.”