How can US sub prime losses be so great?

Martha2

We are told that the crisis is down to sub prime mortgage failures.

However, I still cannot quite understand how the fact that some Americans defaulting on mortgages could have sparked this worldwide crisis. Surely the houses have been repossessed by the lenders; these repossessed houses and their land must still be worth something. How can such vast sums have been lost in this way?

M

opinions4u

Take out a $100,000 mortgage on a house worth $100,000.

Property value drops 40%.

Interest accrues for a year at, say, 6%. No payments made.

You now have a $106,000 mortgage on a $60,000 property.

Somebody sets fire to the abandoned property.

It's now only worth $20,000.

Even bigger loss.

LongTermLurker

Martha2 wrote: »

Surely the houses have been repossessed by the lenders; these repossessed houses and their land must still be worth something. How can such vast sums have been lost in this way?

M

(following on from o4u)... even without burning down the house, if the bank reposesses it, they can't lend it to another bank - owning a million reposessed houses isn't the same as having £100bn.

But - the problem is far more detailed:

1. you have little or no income, but the bank lends you £100k
2. the bank passes your debt to an investment company
3. the investment company puts your £100k debt with lots of other £100k debts, mixes them up and sells them on the stockmarket as Collatoralised Debt Obligations (or something like that)
4. HSBC buys some CDOs which include bits of soon-to-be-defaulters' loans
5. HSBC lends money to Barclays
6. Barclays use that money to buy CDO....
7. Half of the US stops paying their mortgages, CDOs are worthless and Barclays can't get it's money back from HSBC because HSBC's money is tied up in worthless CDOs
8. Because no-one knows who bought the little bits of your debt, no-one knows which banks are at risk
9. Because no-one knows which banks are at risk, banks stop lending to each other
10. Because HSBC won't lend money to Northern Rock, NR has to get it from the Bank of England
11. Because NR has gone to the BoE, everyone thinks they must have bad debt and customers withdraw all their money
12. Now NR has lots of debt and no money...

Queue the music...

That's my understanding, which probably isn't 100% accurate, but close enough to get an idea.

opinions4u

LongTermLurker wrote: »

(following on from o4u)... even without burning down the house, if the bank reposesses it, they can't lend it to another bank - owning a million reposessed houses isn't the same as having £100bn.

But - the problem is far more detailed:

1. you have little or no income, but the bank lends you £100k
2. the bank passes your debt to an investment company
3. the investment company puts your £100k debt with lots of other £100k debts, mixes them up and sells them on the stockmarket as Collatoralised Debt Obligations (or something like that)
4. HSBC buys some CDOs which include bits of soon-to-be-defaulters' loans
5. HSBC lends money to Barclays
6. Barclays use that money to buy CDO....
7. Half of the US stops paying their mortgages, CDOs are worthless and Barclays can't get it's money back from HSBC because HSBC's money is tied up in worthless CDOs
8. Because no-one knows who bought the little bits of your debt, no-one knows which banks are at risk
9. Because no-one knows which banks are at risk, banks stop lending to each other
10. Because HSBC won't lend money to Northern Rock, NR has to get it from the Bank of England
11. Because NR has gone to the BoE, everyone thinks they must have bad debt and customers withdraw all their money
12. Now NR has lots of debt and no money...

Queue the music...

That's my understanding, which probably isn't 100% accurate, but close enough to get an idea.

Would go with that!

sabretoothtigger

I get the impression bankruptcy & handing the keys over is a much more acceptable option in the usa.
Over here if you give up the mortgage, the rent to get somewhere else in the area is probably even more, it doesnt make much sense.
They had a real collapse in inflated prices and wont recover for years to come, our situation is connected to theirs but on the ground here I think we are better off though it doesnt show right now

StevieJ

Martha2 wrote: »

We are told that the crisis is down to sub prime mortgage failures.

However, I still cannot quite understand how the fact that some Americans defaulting on mortgages could have sparked this worldwide crisis. Surely the houses have been repossessed by the lenders; these repossessed houses and their land must still be worth something. How can such vast sums have been lost in this way?

M

Did you not see those house repo's for sale in Detroit, between 500 and 900 USD? some loss.

sabretoothtigger

Houses and land sold for 500 dollars?

turbobob

I read of a house up for $1 in Detroit I think.

StevieJ

sabretoothtigger wrote: »

Houses and land sold for 500 dollars?

Loads of them on estate agents site I saw, pretty and new with one of those
granny verandas on the fron, having said that they were obviously in a rough area affected by the demise of Motown.

RayWolfe

I've got a lot of sympathy for the OPs question. LTL posted - in explanation - that half the US mortgage holder stop paying their mortgage ... well, I'm sure that many did (are) but half?
We can only surmise, but I guess that most people are paying their mortgage and the US has seen a many hundred percent rise in house prices as we have. So the point is that relatively few will not be repaying and relatively few will be in negative equity territory. Therefor this must be blind panic.
Confidence in any banking system is a very fickle thing and even though it's obvious that no government US, UK or any other is going to let depositors lose their money, people are still panicking.
Yes, bankers have really messed up this time, but not enough to collapse Earth into a black hole, surely?

cheerfulcat

Martha2 wrote: »

We are told that the crisis is down to sub prime mortgage failures.

However, I still cannot quite understand how the fact that some Americans defaulting on mortgages could have sparked this worldwide crisis. Surely the houses have been repossessed by the lenders; these repossessed houses and their land must still be worth something. How can such vast sums have been lost in this way?

M

Martha, as others have written, it's partly the selling-on of the debt that triggered the wider problems.

I have to say though that it seems to me that politicians are a little too quick to pin the blame on American would-be homeowners, who are after all not the only ones to have blown fortunes on a debt-fuelled spending spree...the problems are wider and deeper than that, and the markets recognise that fact.

Ray Wolfe ( sorry, I was posting while you were...)

We can only surmise, but I guess that most people are paying their mortgage and the US has seen a many hundred percent rise in house prices as we have. So the point is that relatively few will not be repaying and relatively few will be in negative equity territory. Therefor this must be blind panic.

FWIW a poster on another forum ( BertEE on TMF if you want to have a look ) who deals in bonds in a professional capacity has said that prices are crazy - basically things in the credit markets are priced to go bust ( 40 cents in the dollar I think he mentioned ). So I expect blind panic would come into it...