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I’ve had the opportunity to listen to the latest (when I started this entry) podcast of “This American Life” which explains from head to toe how the mortgage crisis started and who/what was behind it. I’ll try to summarize:

At the very head of problem is the growing pool of global money. Say like the Chinese federal bank who has over a trillion USD. People/entities with lots of assets. These assets amount to around 70 trillion USD. Well more than the total budget of all the world’s goverments. These investors want to have safe investment venues in which to grow their pool of money. Typically they’d such things as treasury bonds, municipal bonds. Well, in the early 2000’s when Alan Greenspan was still head of the U.S. Fed, he sent out a clear message to those investors by hold the federal funds rate steady at around 1%. That in turn guaranteed that the treasury bonds, etc wouldn’t yield much of a return for a long while. Which made them turn to wall street to find other instruments to invest in. So those gurus in the stock market decided to sell them home mortgage loans. Since people around that time were paying at least 5% on those 30 year loans, they made perfect sense to bundle those and sell them as investments. At this point, all was good and nice. No problems. The loans they sold were from approved and verified people with good credit, steady jobs.

(This is where I stopped writing. Now one month later, I’m finally going to finish it. It’s going to be rough. I don’t feel like putting much polish on it at this point.)

Well this global pool is huge, much larger than what the market could bundle together and sell to them. So in a nutshell, they needed more mortgage loans. And they got it any way they could. Wall Street told the companies that were selling mortgages they wanted more and those people told those lower down they wanted more, and finally to the mortgage companies who had to find ways to get more people loans and get them larger loans. So they started relaxing their standards, their background checks, down to the point of NINA loans. No Income No Asset. You don’t have to disclose income or assets on your loan application. Completely absurd eh?Well of course you can foresee future problems here. People getting in way over their heads. The blame here lies on both the borrower and the lender, all the way back up to those who sold the mortgage backed securities in Wall Street.

Feel free to comment. I don’t pretend to know everything about it. But I think I have the jist of it down.