October 11th, 2008 11:37 PM by Sam Kader
The collaterization of Mortgage Backed Securities (MBS) began in 1977 when Lewis Ranieri - a self-taught bond seller at Salomon Brothers started selling MBS as Collateralized Mortgage Backed Securities divided up in traunches (risk). In 1993, MBS (subprime) loan business was at $34 billion. In 2002, combination of high housing demand, deregulation, and low interest rates propelled the growth from $215 billion to $1 trillion in 2006. The expansion of credit has been a good thing in many ways. At that time when income was stagnant, borrowing has made it possible for many people to afford purchases and cover short term expenses. However, all borrowing came at a heavy cost. Americans borrow to cover ordinary living expenses and save at only 1%. With credit tightening, consumers are more mindful of their spending habits.
In 2007, 93% of MBS were sold as subprime and nontraditional loans. Delinquencies and foreclosures rose to record heights in 2007 followed by a collapse of housing prices and MBS of that same year.
This video presentation summarized the incident as it unfolded.
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