Dilettante economist: the mortgage crisis and the sub-prime ARM that resets after 2 years

A person accepts as keystone, conversational knowledge that ‘sub-prime loans’ caused the mortgage crisis of 2008-09 and onward.

Both too simple and too opaque though.  I have mulled this for years since, and have been befuddled at the intersection that seemed just a run of the mill softness in the economy in the summer of 2008 and then all these people defaulting on their mortgages. It needed a more mechanical explanation, something more than ‘greedy bankers’ and “irresponsible home-buyers.”

Well, there was that, but specifically it was the widespread adoption of the 2 year resetting sub-prime ARM (rather than the conventional 5 year ARM).  See the gal’s tweet storm below.  I’ve never seen it expressed so succinctly re how the real estate bubble stopped inflating.  Ya know, it couldn’t go any farther, hit a limit….and people who counted on being able to sell if they had to then could not, with their house payments tripling, all in this very short window.

I buy that explanation, makes sense.  It was a lot of people riding that train when it stopped.  Thing is, I think you also had a lot of people that were otherwise credit worthy using the sub-prime arm to expand their borrowing limit to buy a better class of McMansion or leverage income producing properties together. Made it worse. You can call this the ‘house flipping culture’.

You go on to the inevitable governance observation, and it’s not obvious to me it all came about from ‘lack of regulation’ in the way people think it did.  Ya know, Lehman Brothers and AIG get to be in the securities business and they get to write puts and calls and swaps.  It’s no crime that the holders of those contracts insist they pay out if circumstances dictate.  And securitization of mortgages: not that exotic an idea, pretty blasé.

Anyway, I was behind on my house payment in the ensuing years, like a month behind, for a while.  Missed a payment in the slow economy.  Got caught up, had good fortune, had help.  Doable, cuz I never had an ARM and I have a small house.  Formatively, when I was buying my house in 2000 I asked my dad how I should finance it, because I was seeing people doing a lot of different things.  He said ‘get a 30 year fixed’.


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