Mortgage-backed securities resemble bonds, instruments issued by governments and corporations that promise to pay a fixed amount of interest for a defined period of time.
Mortgage-backed securities are created when a company, such as Bear Stearns, buys a bunch of mortgages from a primary lender – the company mortgages eliminate from – and then uses your monthly payments, and those of thousands of others, as the revenue stream to pay investors who have bought chunks of the offering. They allow lenders to sell the mortgages they make, thus replenishing their coffers and allowing them to lend again. For their part, buyers of mortgage-backed securities take security in the knowledge that the value of the bond doesn’t just rest on the creditworthiness of one borrower, but on the collective creditworthiness of a group of borrowers.
-From “What is a mortgage-backed security?” by Chris Wilson, Slate.com
2000 – The steep decline in the stock market causes the Federal Reserve to drastically lower interest rates. Low interest rates encouraged expensive purchases for many, such as homes, and institutions appealed to millions of lower-income individuals with adjustable-rate mortgages, which were mortgages that begin with an initially-low payment before changing to a higher market rate, as per contract. The low interest rate prices also led to an increase in the demand for homes, which drove up the price for homes, causing a bubble.
2006 – Default and delinquency on home mortgages begin to rise.
Winter 2007 – The credit crunch begins.
2007 – A real-estate slump begins to slow down the economy. “Many economists believe that the economy entered a recession at the end of 2007 or early in 2008,” according to the New York Times.
July 2008 – Oil prices peak at $147 a barrel. The highest recorded average price in Nebraska is $4.10 for regular unleaded.
Spring 2008 – The value of the American dollar compared to foreign currencies, which had been falling since 2002, declines to one of its weakest points in history. A dollar in 2006 can purchase only 50 percent of what a dollar in 1983 could. “In March 2008, the dollar sank below 100 Japanese yen for the first time since 1995. The euro rose above $1.60 at the end of April 2008 for the first time,” according to the New York Times.
The weakening dollar made commodities such as oil, wheat and corn more expensive.
May 30, 2008 – Bear Stearns, an investment bank and securities trader, is purchased by JPMorgan Chase for $10 a share with the help of the Federal Reserve. Several of Sterns capital funds in mortgage-based securities drop substantially in value as mortgages go bad.
Bear Stearns was the first of the five large and powerful Wall Street investment banks to fail. Currently, three of the five have either been acquired or have filed for bankruptcy. The other two formally changed their business strategy to become more secure.
Fall 2008 – The credit crunch expands into a major crisis on Wall Street.
Sept. 7, 2008 – The federal government announced it would take over Fannie Mae and Freddie Mac, which had been publicly traded, promising as much as $100 billion to help each company. Defaulting mortgages caused deep losses for the pair of companies. Fannie Mae and Freddie Mac are the nation’s largest purchasers of mortgages from banks, and each held mortgages as investments or sold the debt to investment banks as securities. The announcement caused a large drop in investment bank Lehman Brothers stock.
Sept. 14, 2008 – Merrill Lynch is purchased by Bank of America for $50 billion, or $29 a share. Merrill Lynch purchased many mortgage-backed securities, which lost value and set the company back financially. The sale of the company was negotiated to avoid bankruptcy. Bank of America previously purchased mortgage company Countryside for $4 billion in January.
Sept. 15, 2008 – Lehman Brothers files for bankruptcy after selling off large parts of the company in order to raise money. Unpaid or defaulted mortgage-based securities crippled the company, the stock price tanked and the firm failed to receive bailout money from the Treasury Department. The Dow Jones industrial average falls 504 points.
Sept. 16, 2008 – American International Group Inc. (AIG) collapses. AIG is the largest insurance company in the United States and insured payment for companies that purchased mortgage-backed securities. The company lost substantial amounts of money by paying out on insurance claims. AIG received $150 billion from the Treasury in November; the government decided the consequences of the company’s failure would be too far-reaching.
Sept. 18, 2008 – After falling 449 points the day before, the Dow regains 410 points, to 11,019. The increase in demand for treasury bonds drops the return on them to zero, meaning people are willing to have the government hold the money and receive no interest.
Sept. 20, 2008 – The Bush administration announces it would seek Congress’ approval for a $700 billion bailout bill.
Sept. 21, 2008 – Goldman Sachs and Morgan Stanley formally ask the Federal Reserve to change their status from investment banks to bank holding companies that are subject to greater regulation. They were the remaining two of the five large Wall Street investment banks.
Sept. 24, 2008 – “Sen. John McCain, the Republican presidential nominee, said he was temporarily suspending his campaign to deal with the crisis.” (New York Times) He reversed his decision two days later.
Sept. 25, 2008 – Federal regulators seize Washington Mutual, the nation’s largest savings and loan institution. In the late 1990s and early 2000s, the company became the nation’s top bank in providing mortgages, especially to lower-income individuals. Regulators reached a deal for most of the bank operations to be acquired by JPMorgan Chase.
“It was by far the largest bank failure in American history so far,” wrote the New York Times.
Sept. 29, 2008 – The U.S. House of Representatives rejects the $700 billion bailout bill to buy mortgage-backed securities, 228 to 205. The Dow Jones industrial average fell 778 points to 10,365.
Oct. 1 - 3, 2008 – The Senate approves the revised bailout bill. The House follows, and President George W. Bush signs the bill.
Oct. 3, 2008 – Wachovia is sold to Wells Fargo for $15 billion. Wachovia bought Golden West Financial and acquired many of the institution’s bad mortgages. Wachovia was originally promised to Citigroup, but Wells Fargo offered seven times more than Citigroup.
Oct. 6, 2008 – The Dow loses 369 points and finishes below 10,000 for the first time in four years. The Dow continues its fall, losing another 500 points the next day, even as the Federal Reserve frees up lines of credit for business and hints at another drop in interest rates.
Oct. 9, 2008 – The Dow loses 679 points, about 7.3 percent, and finishes below 9,000 for the first time in five years. It was the busiest day in the history of the New York Stock Exchange. Stock exchanges around the world posted similar percent losses.
Oct. 13, 2008 – “Since the spring and early summer … wheat and corn … have dropped more than 40 percent. Oil has dropped 44 percent. Metals like aluminum, copper and nickel have declined by a third or more,” according to the New York Times.
Stocks soar 936 points on word that the Treasury will inject $250 billion into banks. It was the single largest percentage gain in 75 years. Stocks would fall 733 points two days later.
Oct. 20, 2008 – The Dow gains 413 points.
Oct. 22, 2008 – The Dow loses 514 points. Oil falls 54 percent from its July high to $66.75 per barrel, and the dollar continues to rise in relation to the euro: 1.27 euro to 1 dollar.
Oct. 28, 2008 – The Dow gains 889.53, closing at 9,065, on word that the Federal Reserve will cut interest rates. The following day, the Fed cuts rates by half a percent to 1 percent.
Nov. 4, 2008 – Barack Obama is elected the 44th president of the United States. “Highest on (his) agenda was said to be passage of a new economic stimulus package.” (New York Times)
Nov. 7, 2008 – It is reported that the rate of unemployment increased to 6.5 percent in October, the highest rate in 14 years.
Nov. 12, 2008 – Acknowledging banks are still unwilling to loan individuals money, the Treasury department shifts the strategy behind the $700 billion bailout to focus on consumers.
Nov. 18, 2008 – The Detroit Three automakers – G.M., Ford and Chrysler – plead unsuccessfully with lawmakers for a $25 billion bailout.
Dec. 4 – The Detroit Three return with definitive plans to avoid bankruptcy, and the request for the bailout grows to $34 billion. A bailout bill of $14 billion dies in the Senate a week later.
Dec. 14, 2008 – The average gas price in Nebraska is $1.655 for regular unleaded.
The Dow Jones Industrial Average added 64 points Friday, closing at 8,629.
Sources: New York Times, AAA, Bureau of Labor Statistics “Purchasing price of the Dollar: 1950-2006”
kiahhaslett@dailynebraskan.com
Be the first to comment on this article!