Mortgaged Loans can bring down the Economy of the United States?

Date: 2010.02.19 | Category: business and finance | Tags:

In 2008, the United States reached the brink of financial disaster. Unemployment apparently reached its highest level in two decades [source: Boston Globe - in English]. The number of defaults on loans to homeowners was a record. Major investment banks that were active for more than a century and survived the Great Depression (in English), suffered a collapse. The economy, in other words, was going down the drain. And all this, each part of this economic disaster, was caused by a single financial instrument: the mortgaged loan.

Evidence of mortgaged loans are simply actions of a residential loan sold to investors. They work like this: a bank lends money to the borrower to buy a house and receive monthly payments for the loan. This loan and many others, perhaps hundreds, are sold to a larger bank that unifies the loans in a mortgage title. Then the bank issues more shares of this title, called tranches ( “pieces” in French), to investors who buy them and end up receiving the dividends in the form of monthly mortgage payments. These tranches can be unified again and sold like other securities, called collateralized debt obligations (CDOs – collateralized debit obligations). The residential loans in 2008, were so divided and distributed in the financial district that was entirely possible for a homeowner have, unconsciously, shares of its own mortgage.

This does not seem to be harmful, and is not even. It is also an excellent and safe way to make money when the housing market is booming. In the early 21st century, the housing market in the United States was booming. A person who buys a new house in January 1996 for 155 thousand U.S. dollars could expect to make 100 thousand dollars to sell it in August 2006 [source: U.S. Census Bureau, CNN Money - in English].

But 2008 was not equal to 2006, the housing market in the United States was no longer in high and were evidence of mortgaged loans that ended up with this market.

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