Catastrophic loss in homeownership

[Account Closed]

I find it amazing that only 2.1% change in home ownership was this catastrophic. And, of course, it could never happen again. Lol

Home ownership has never been 100% in the United States. Many people think that the vast majority of people live in owner occupied properties.  It isn't even close. 

The norm hovers around 66% or about two thirds own their own home. In the second quarter of 2008 home ownership was about 68.1%. Home ownership fell to about 66% in 2011 - this 2.1% fall in home ownership caused the real estate crisis and crashed the economy. Banks were selling derivatives.

How Derivatives Work

Most derivatives start with a real asset. Here's how they work, using a mortgage-backed security as an example.

• A bank lends money to a homebuyer.
• The bank then sells the mortgage to Fannie Mae. This gives the bank more funds to make new loans.
• Fannie Mae resells the mortgage in a package of other mortgages on the secondary market. This is a mortgage-backed security, which has a value that is derived by value of the mortgages in the bundle.
• Often the MBS is bought by a hedge fund, which then slices out portion of the MBS, let's say the second and third years of the interest-only loans, which is riskier since it is farther out, but also provides a higher interest payment. It uses sophisticated computer programs to figure out all this complexity. It then combines it with similar risk levels of other MBS and resells just that portion, called a tranche, to other hedge funds.
• All goes well until housing prices decline or interest rates reset and the mortgages start to default.

That's what happened between 2004 and 2006 when the Federal Reserve started raising the fed funds rate.

Many of the borrowers had interest-only loans, which are a type of adjustable-rate mortgage. Unlike a conventional loan, the interest rates rise along with the fed funds rate. When the Federal Reserve started raising rates, these mortgage-holders found they could no longer afford the payments. This happened at the same time that the interest rates reset, usually after three years.

As interest rates rose, demand for housing fell, and so did home prices. These mortgage-holders found they couldn't make the payments or sell the house, so they started defaulting. For more, see Subprime Mortgage Crisis Timeline.

Year & Percent home owner ship

https://www.census.gov/housing/hvs/files/qtr413/q4...