Beginning in the Spring of 2007 the stock market reporters discussed some problems in sub-prime loans and predatory lending practices by some mortgage companies. At first the stories were merely in passing, but as the months rolled by the story became front page news. The President of the United States, China’s financial network and the Chairman of the Federal Reserve have weighed in on what is supposed to be a small percentage of no credit borrowers reneging on their mortgage. So why is everyone so worried about some lousy mortgages?
The simple answer is that the old fashion mortgage with your friendly Mr. Cribbs at the bank downtown is on the endangered species list. The mortgage market today spans the globe. Within days, weeks and months of a mortgage closing it is sold all over the world in bundles of commercial paper.
This complex network of holders of the note are bought and sold by financial brokers, and a others who make these commercial papers part of their portfolio. The problem occurs when trying to determine who bought the risky, defaulting loans. Some of the loans are in the process of foreclosure, some are at risk for foreclosure and still others are foreclosed. The real problem here is assessing risk to unknown factors. Banks, lending institutions and mortgage companies do not like speculation on risk.
The most significant effect all of these risks have effected the Stock Market is the tightening of the credit market. Some banks and mortgage companies have simply stopped making loans. Others, have made refinancing and new loans with increased restrictions. The credit market is squeezed and that effects big stock market players like banks and financial institutions like Bear Sterns. It also effects consumers who are seeking refinancing and new mortgages.
