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If You Want a Great Overview of the Subprime Mortgage Crisis, READ THIS BOOK!
By JLP | July 7, 2009
I finally finished reading David Faber’s And Then the Roof Caved In: How Wall Street’s Greed and Stupidity Brought Capitalism to Its Knees
Despite what some of the negative reviewers say about the book on Amazon, this is a great book. Some of the Amazon reviewers gave it a one star because too many other people gave it a 5-star! Others said things like, “Nothing new here.” Well, it’s supposed to be an account of what happened—a historical book. Anyway, I thought David did a great job of condensing the events that led up to the subprime mortgage crisis into a book that is actually enjoyable to read. I found myself underlining lots of passages and adding notes like, “WOW!” and, “This is crazy!” I even stopped several times and read things to my wife—something I don’t do very often.
The book opens with a discussion of how Federal Reserve’s reaction to the Technology Bubble’s bursting and 911 led to low interest rates for far too long, which spawned the housing bubble. In other words, cheap money played a significant role in creating the subprime crisis. It is amazing how one thing leads to another. With the subprime crisis, you could almost see the progression of events.
The book begins with the bursting of the technology/internet bubble and the Fed’s reaction to both that and 9/11. Remember, the Fed uses to the Fed Funds Rate to stimulate and to cool the economy. The Fed had driven up the Fed Funds Rate to 6.5% at the time the NASDAQ was peaking in March 2000 and in response to the bubble bursting, drove them back down to 3.5% by September 2001. Then, in reaction to 9/11, the Fed took the following actions:
These lower rates, which affected mortgage rates, inspired people to refinance their homes in record numbers. As the author points out, some people were refinancing to get a lower interest rate and a lower payment. Others were refinancing and taking their home’s equity and using it to buy things.
All this cheap money also meant that fixed income investors weren’t making very much money. This led Wall Street to look for other ways to find yield, which they found in the bundling of mortgages into Collateralized Debt Obligations (CDOs). NOTE: I’m summarizing here so I’m leaving out a lot of details which you can find in the book. These CDOs were sold all over the world to yield-hungry investors.
Wall Street’s demand for mortgage-back CDOs inspired mortgage brokers to make more loans. Why? Because these brokers were assured of a buyer for any mortgage they wrote. It was to their benefit to write as many mortgages as possible without any consideration to the buyer’s ability to actually pay the mortgage beyond 90 days (according to the book, the mortgage broker faced losses if the buyer defaulted within the first 90 days of the mortgage).
Competition among mortgage brokers and bankers drove standards downward. Mortgage seekers could get by merely stating their income. They could also get a mortgage for 95% to 100% of the purchase price of the home, which was unheard of just a few years before. They were also using all sorts of different loans in order to purchase their homes. By 2006, 40% of all loans made were of the subprime and alt-A category, which are much riskier than a traditional prime mortgage.
People were also using adjustable-rate mortgages and other mortgages with low teaser rates that adjusted upward after a couple of years. Of course, all this action drove housing prices skyward. People had no fear of their mortgages adjusting upward because if they did, they would just refinance into a newer mortgage and get their payments back down to a manageable level.
Those were the main characters in the mortgage crisis but the book also describes other characters who played significant roles.
• The rating agencies that blessed some of the mortgage-backed CDOs with AAA ratings even though they were loaded with subrpime mortgages. Unsuspecting investors purchased these AAA rated securities, thinking they were getting a safe investment. WRONG!
• AIG, which insured a lot of CDOs but didn’t have the necessary reserves to cover all the claims.
7bull; The Fed turning a blind eye to what was going on. Greenspan claims there was nothing he could have done to prevent the crisis or that the prevention of the crisis would have been worse. Who knows…
Like I said earlier, I greatly summarized the events and characters of the subprime crisis. For more detail—but not too much to bog you down—read And Then the Roof Caved In
GIVEAWAY…
Now, for those of you who made it all the way through my review, I’d like to give you the opportunity to win a copy of the book (on me). All you have to do is leave a comment. I will select one commenter and send them a copy of And Then the Roof Caved In
1. You must be a resident of the USA or Canada (I won’t mail internationally).
2. You can only enter one time.
Good luck and thanks for reading!
*Affiliate Link
Topics: Books, Credit Crisis, Housing Market | 35 Comments »
July 7th, 2009 at 1:34 pm
Sounds like a really interesting book. I am looking forward to reading it.
July 7th, 2009 at 2:04 pm
Count me in.
July 7th, 2009 at 2:23 pm
You have my curiosity…haven't read it, yet. Thanks!
July 7th, 2009 at 2:35 pm
Very interested… Count me in!
July 7th, 2009 at 2:42 pm
Count me in. I hope you can get the traffic numbers up, I enjoy reading your blog.
July 7th, 2009 at 2:50 pm
Sounds interesting!
July 7th, 2009 at 2:51 pm
would enjoy reading it.
July 7th, 2009 at 2:52 pm
Come on 7….
July 7th, 2009 at 2:53 pm
perfect summer reading!
July 7th, 2009 at 2:55 pm
I might be showing my ignorance here, but are the rating agencies in any way liable for the actions? i.e. can anyone sue them for giving a AAA rating on a heavily risky mortgage back CDO?
July 7th, 2009 at 3:14 pm
The book does, indeed, sound intriguing – and something one might want to reread in a dozen years to compare further to the aftermath.
July 7th, 2009 at 3:15 pm
Don't forget about the part Congress played in the whole thing.
July 7th, 2009 at 3:23 pm
Hmmm, I wasn't aware that Canada had become part of the USA. However, since we're included count me in!
July 7th, 2009 at 3:30 pm
I am interested in this one
July 7th, 2009 at 3:37 pm
Would love to read this!
July 7th, 2009 at 3:42 pm
I'm in!
July 7th, 2009 at 3:57 pm
Sounds like a great review of the events.
Does the book include decisions by Fannie/Freddie that lead to the lowering of loan standards?
Or changes in the CRA that also fanned the flames?
Love to read the book. Count me in for the contest.
July 7th, 2009 at 4:02 pm
I have yet to read a complete description of the whole ball of wax, so yes, please include me in your raffle.
July 7th, 2009 at 4:24 pm
Count me in.
July 7th, 2009 at 5:33 pm
Always good to understand even if I can not do too much to change the way things may go
July 7th, 2009 at 5:54 pm
I would like to read a good book.
July 7th, 2009 at 6:28 pm
I currently have this book on reserve at my local library, but I would LOVE to have my VERY OWN copy.
July 7th, 2009 at 1:40 pm
Hey, your comment work now. Halleluiah!
July 7th, 2009 at 2:25 pm
Testing…
July 7th, 2009 at 2:57 pm
You got me interested
July 7th, 2009 at 4:44 pm
Thanks JLP. By the way, have you uncovered the root of your loss of traffic from Goggle?
July 7th, 2009 at 6:20 pm
Made me think of Michael Lewis’s “The End” (available at http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom) which, among other things, asks whether anyone got rich off of the ensuing bust.
July 7th, 2009 at 6:32 pm
I don’t get much time to read anymore, but this looks like one worth that time.
July 7th, 2009 at 7:49 pm
Yes, I like mortgages.
July 7th, 2009 at 10:59 pm
I can change
July 8th, 2009 at 5:47 am
Would very much like to read this book. Thanks for offering a copy.
July 8th, 2009 at 7:26 am
Count me in.
July 8th, 2009 at 7:35 am
count me in too
July 8th, 2009 at 8:33 am
Your review sounds interesting, I’d like to read the book. Thanks for the giveaway.
July 8th, 2009 at 10:32 am
I enjoyed your review. It sounds like a good read.