What the Hell is Going On?!

Wansley: As unemployment ticked up, housing prices went up and some people were left with houses that had negative equity, meaning they owed more than their house was worth. People had been turning these houses over at such a high rate because they could get such good interest rates [and turn around and sell the house before their ARM interest rate went up] but when the interest rate went up on their loan they realized they hadn’t been paying any of the principal. It was like musical chairs, but the music stopped and the music can never go on forever.

Murray: In 2007, the economy began to see a market that was no longer growing, and there were a large number of people who had been allowed to get these sub-prime loans when they couldn’t afford them. [In the third quarter of 2007, sub-prime ARMs only represented 6.8 percent of the mortgages outstanding in the U.S., yet they represented 43 percent of the foreclosures, according to last year’s Mortgage Bankers Association National Delinquency Survey.] They weren’t able to meet their loan payment. Housing prices became flat and began to decline, which put borrowers who held better mortgages (meaning they had put a down payment or had a good line of credit) in a position where they owed more than what their house was worth. Then the economy slowed and many individuals were experiencing reduced work or reduced income, and those who had been in good standing could no longer make mortgage payments.

Cherry: People were buying houses and then flipping them and that kind of making-money-quick may work for a time, but it doesn’t hold water in the long term. People get used to 20 and 30 percent on returns and it becomes a bubble that eventually bursts.

HOW THE “FINANCIAL FLU” SPREAD

Murray: It acted as a contagion: So many institutions were holding up other institutions, and many of these financial institutions only had these mortgages as assets, which creates a problem. If you bought a home in 2005, your ARM interest rate clause said that after the honeymoon period your interest rate jumped in 2007. Borrowers found themselves owing more than they had originally paid for the house, and we didn’t know this was happening until February or March [of 2008]. Back in the winter we thought it was just a sub-prime problem; [but then] we realized it had affected prime loans. Major mortgage bankers were now seeing a ripple effect, then it began to go beyond the mortgage market to the credit industry, then to investment houses that banks owned stock in, thinking it was a strong asset. But now [the mortgages owned by the investment houses] no longer had the same value. Financial institutions became conservative with their loans, feeling safe to lend to those only with strong credit, and there were no loans [money] being put back into the market. It spread across the country and then across the globe. Foreign investors and companies have investments in American markets and when those don’t perform and you start to lose money, you sell. It’s a rippling affect because of the globalization of our capitalist market. You see how easy it is for the flu to spread.

Wansley: The net effect: Value of these securities owned by investment houses declined. The assets on someone’s balance sheet have to balance, so what went down was the bank’s equity.

WHERE TO POINT THE FINGER

Jones: The United States housing policy has always been to expand home ownership, and they thought they had found a way to expand, but they just became much too lax. People should’ve been a little less greedy — of course that’s hindsight.

Cherry: People bought bigger mortgages than they could afford. We need to be self-disciplined in credit, and consumers need to follow basic rules of thumb. On the lender’s side, it was wrong for them to give people a loan for more than they could hope to pay back.

Murray: Three players: banks, consumers and the Fed. The Fed let us down; they changed the rules of the game. It used to be the originators of mortgages were banks, and they knew the people that held them. But then when mortgages began to be repackaged and resold and resold… once you get past one resale you don’t know the value of the mortgage anymore.

Wansley: Consumers were incentivized to buy what they couldn’t afford. Banks were incentvized to provide these teaser rate mortgages.

Lugo: This all began in the Reagan administration when we started deregulating and putting people’s pension plans into the stock market. We were taking the collective wealth of the working class to make money for large corporations. We need to end deregulation, which is what brought us into this disaster. These artificially inflated housing prices created a bubble and that bubble burst.

WHAT ABOUT MY MONEY?

Wansley: People in Knoxville don’t need to worry about their money because most of it is money that’s secure. Please don’t take money out because it’s not there — it’s out earning money for the bank. But it’s secure. If people have $500,000 in a CD, they might want to spread it out, but that would’ve been wise five years ago, one year ago or last week because $100,000 is all that’s insured.

Cherry: A good money manager does not go to bed smart and wake up dumb. People are looking at their principal and seeing that it’s down in value and they are afraid there is no value. But there is, and blue chip companies will continue to make great investments for the invidual. If you’re just a man on the street: Focus on what you can control. We can control our own behavior and our own state of mind and not be led by emotions. We can’t control what’s going on with Congress or on Wall Street.