Backup

Backup

Homeowners
1. Represents: Mortgages
  1. Houses
2. Linked by Wall Street
Investors
1. How they Make Money?
  1. Invest in treasury Bills From FED
    1. It wasn't worth investing in treasury bills due to the LOW INTEREST RATE caused by the DOT COM BUST (2000)
      2. Banks now wanted to borrow more money from the FED due to the low interest rate (2000)
        With cheap credit, banks now have an abundance of LEVERAGE
        With leverage, Wall street makes lots of good deals and money and grows very rich . They then came up with an idea to make more money by...
        Connecting
        Homeowners
        Investors
        THROUGH MORTGAGES
        How it works
        1) A FAMILY pays a down payment to a MORTGAGE DEALER to receive a mortgage which would make them home owners
        2) The mortgage dealer would then sell the mortgage to an INVESTMENT BANKER.
        3) The INVESTMENT BANKER then borrows millions and billions of money from banks to buy thousands of mortgages
        4) This means that the INVESTOR gets thousands of payments from the HOMEOWNERS for their mortgages every month. Additionally, the INVESTMENT BANKER also chose to sell some mortgages to INVESTORS to make more money
        5) The INVESTMENT BANKER wanted more mortgages however, there were no more mortgages left as everyone who qualified for a mortgage already owned one
        6) This gave the MORTGAGE LENDER & INVESTMENT BANKER the idea of creating SUB-PRIME MORTGAGES
        7) If a homeowner defaults on his/her mortgage, the rights to the home which can be re-issued again goes back to the INVESTMENT BANKER
        8) If a homeowner defaults on his/her mortgage, one of the INVESTMENT BANKERS monthly payments turns into an un-issued house which can be put up for sale again
        9) Due to the influx of Sub-Prime mortgages, more and more irresponsible homeowners were defaulting from their mortgages
        10) Due to the high number of defaulted mortgages, there was now a higher supply of houses as there was a demand for it.
        11) Due to the high supply of un-issued houses, housing prices stopped increasing and started to FALL
        12) Homeowners who could still afford their mortgages also choose to default from their mortgages as the current value of their house was much lower as compared to the mortgage which they were paying off
        13) Default rates increases drastically nationwide, causing the prices of houses to PLUMMET
        14) Now, the INVESTMENT BANKER was holding on to thousands of un-issued houses
        15) The INVESTMENT BANKER try to sell off these useless houses to investors, however no one was stupid enough to invest in them.
        16) With no supply of income from these un-issued houses, the INVESTMENT BANKER is now unable to pay back the millions and billions of dollars which he borrowed to buy the mortgages. (bubble 3)
        17) The INVESTORS who had also purchased thousands of these defaulted mortgages were also experiencing the same problem (Bubble 4)
        18) The MORTGAGE LENDER is also unable to sell any more of his mortgages to anyone.
        19) Current HOMEOWNERS were also now living in houses which were useless investments
        20) With no sources of income, the financial system freezes and everyone declares for BANKRUPTCY
        Which ultimately leads to
        Sub-prime Mortgages: Mortgages issued to a person without the need of a down payment, proof of income of any other supporting documents (Irresponsible homeowners)
        Why was Sub-prime mortgages created even though the homeowner probably cannot pay back his/her mortgage?
        1) If a mortgage owner is unable to pay back his/ her mortgage he/she is defaulted from their mortgage
        2) If a mortgage owner defaults from his/her mortgage, the property and rights of their house would revert back to the lender (INVESTORS)
        3) The investor would then receive a house which is always rising in value. He/she can choose to put it up for sale again
        Prime Mortgages: Mortgages issue to RESPONSIBLE homeowners
        Better investment as compared to the 1% Treasury bill offered by the FED
        This would mean that the INVESTMENT BANKER would receive the monthly payment for that mortgage from the homeowner (Mortgage owner)
    2. Treasury Bill: Similar to a government bond but has a shorter maturity of a year or less
2. Represents: Their Money
  1. Funds (Investments) in Large Institutions
Parties involved

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	Created by Jethro Ong over 8 years ago