The collapse of the sub prime mortgage market has been at the top of the news lately. The massive defaults on American subprime home equity loans have had negative repercussions for financial markets:
- U.S. Mortgage foreclosures are at a record high. The Mortgage Brokers Association of America estimates that 1 million borrowers, or 2% of all U.S. loans, are in foreclosure. Another 3 million homeowners were behind on their payments during the fourth quarter of 2007. These figures are expected to rise by the end of 2008.
- Larger financial institutions are curtailing subprime lending and disengaging related lending units. Merrill-Lynch, who just wrote down $11.5 billion for the 4th quarter of 2007, recently ceased funding loans for it First Franklin home lending unit. Losses incurred from the 2006 purchase of the California subprime lender led to the ouster of M-L chief executive Stanley O’Neal.
- Canadian banks have not been spared by the subprime collapse. CIBC recently posted a $1.46 billion (Canadian dollars) quarterly loss resulting from $3.4 billion in write-downs. The Bank of Montreal’s shares plunged nearly 7% today on fears about the risk related to its American structured investment vehicles.
But what exactly is a subprime mortgage? What caused the subprime meltdown? Who is to blame?
Having read a few books and watched a few movies on the topic … I like this PowerPoint presentation best.
I have no idea who created this presentation but it is hilarious and informative at the same time. Most financial types I’ve shown it to said the descriptions were spot-on, but the lay person will enjoy it just as much … and marvel at the lack of common sense these market geniuses possess in their chase for short-term profits.
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