Mortgages in Minneapolis: What Caused the Mortgage Collapse?

Mortgages in Minneapolis

Mortgages in Minneapolis require mortgage loans. A decade ago, mortgages were easy to obtain. The housing boom pushed up prices of homes and lenders were willing and eager to loan money for mortgages. They were even willing to loan money to people who couldn't afford homes. In 2007, the house of cards collapsed as the 'easy interest' loans were recast (recalculated). When this happened, monthly payments went up 60-80% and people could no longer afford their homes.

The combination of loaning money to people who didn't qualify for a mortgage (subprime loans) coupled with adjustable rate mortgages (ARM's) cause a massive wave of foreclosures.

Many people have blamed Fannie Mae and Freddie Mac (government sponsored mortgage companies) for issuing the subprime loans and consequent mortgage in Minneapolis collapse. As Paul Krugman has written, "Fannie and Freddie had nothing to do with the explosion of high-risk lending. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble." Most of the subprime loans were issued by private lending institutions with little federal regulation.

The mortgage collapse led to further financial calamity. Mortgages are backed with securities held by financial firms. These securities lost much of their value. Investors worldwide cut back of purchases of mortgage-backed debt and other securities. Concerns about the reliability of U.S. Credit and financial markets led to tightening of credit globally and reduced economic growth in the U.S. and Europe.

Looking back on the genesis of the mortgage collapse, it began with changes in banking laws in the 1990's. When the Federal Reserve lowered its rate to 1% and we received a trillions of dollars from China, Japan and the Middle East, we had all the credit we needed. The financial industry had an abundance of money in which to expand.

Wall Street found a new way of investing money call "mortgage-backed" securities. Lenders now sold their mortgages to investment bankers on Wall Street. Wall Street purchased many thousands of these mortgages. Investment bankers were now the final owners of a homeowner's mortgage.

Wall Street took these mortgages and bundled them together as Collateralized Debt obligations (CDOs). CDOs were split into different levels based on risk levels assigned by ratings agencies. AAA were the safest CDOs, BBB's were moderately safe, and Unrated CDOs were for risky investments. Each rating was then packaged again and sold to investors.

As homes lost their values due to multiple foreclosures the supposedly safe, asset backed CDOs began losing value.  This was the beginning of the financial collapse.