The Mortgage Crisis - 10 years on

Aug. 9, 2007: The Day the Mortgage Crisis Went Global


Ten years ago this Wednesday, the first glimpses of the global financial crisis came into view.

The French bank BNP Paribas froze three investment funds, saying a lack of trading in subprime securities made valuing them impossible. The bond market seized up, rattling investors and central bankers who previously soft-pedaled the notion that the U.S. housing bust would hit the economy.

Aug. 9, 2007, marked the beginning of the most far-reaching economic disruption since World War II. The events that Thursday made clear that subprime-lending excesses wouldn’t be “contained,” as Ben Bernanke, then Federal Reserve chairman, had predicted just months earlier. Yet few people appreciated the scope of the disaster that would unfold over the next 18 months.

By now it is widely understood that the global financial industry was overleveraged, that the U.S. mortgage market was rife with loans that wouldn’t be repaid, that investors and financial institutions everywhere were paying high prices for highly rated securities that were actually extremely risky....

Investors knew before that day that souring subprime loans would cause losses. But few realized they would show up with such disruptive effects in Europe, thousands of miles from the epicenter of the subprime crisis in southern California.

Investors understood the housing bust would hit the finances of major lenders such as Countrywide Financial Corp. But even after the firm warned that afternoon of “unprecedented disruptions” in markets, few appreciated how gravely impaired the entire U.S. mortgage sector would become as borrowing costs rose, housing prices fell and losses started to mount.

The depth of the existing losses and the efforts to keep the system running would ultimately combine to turn the August liquidity scare into a full-fledged run on markets.

That day didn’t expose just the disarray of the global financial industry. It also illuminated behavioral patterns that helped accentuate the crisis, notably investors’ expectation that central bankers and other policy makers would intervene when markets started to shake. ...

From the vantage point of August 2017, it is clear there have been changes. Subprime has been banished from the lexicon. Banks are better capitalized and more liquid. Investors are constantly on the lookout for imbalances that might signal a coming market catastrophe.
Comment: How it impacted us: We actually came out OK.

  • Our house valuation dropped fairly dramatically but: Stayed well above what we paid for it in 1996 AND we never went underwater.
  • The housing crisis caused the collapse of Wachovia and its acquisition by Wells Fargo. My job was in limbo but I came out ok. Click Wachovia for my blog coverage of this. I went from top dog in my position to 2nd or 3rd fiddle in the new larger organization but I still received raises and bonuses (but no more promotions)
  • We paid off our house (Fall of 2007) and we were able to begin equity acquisitions big time at cheap prices - eg 1000 shares of FITB for about $ 1 a share.
  • Today our house value surpasses what it was pre-crisis. 

1 comment:

  1. There is something somewhat duplicitous about the notion that the mortgage crisis "started ten years ago." No, it started much earlier as mortgage requirements were loosened, and I remember seeing really bad signs even before George W. Bush took office--my sister in law had a 125% loan to value mortgage in the late 1990s.


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