by Feed your head with a play by Pamela Olson

Created on: August 26, 2008

Why You Should Wait To Buy A House

Mortgage Fraud Caused The Global Liquidity Crisis.

We've all heard about the continuing volatility in the global debt and equity markets. The consensus is the volatility is driven by the on-going troubles in the U.S. housing market. I'm sure many of you are asking "What is really going on?" The crisis quietly started in April 2007 when New Century Financial, a sub-prime mortgage lender, filed for bankruptcy protection. A month later, USB AG, a giant financial company, announced its hedge fund business had lost 150 million Swiss francs in the first quarter from investments it made in U.S. sub-prime mortgages. In July 2007, Wall Street's Bear Stearns closed a pair of hedge funds after hedges on mortgage-backed securities went the wrong way. Before the losses, the funds were worth a combined $20 billion. Bear Stearns described them as isolated incidents, trying to dismiss their importance but investors weren't convinced and Bear Stearns' shares slid, resulting in the dismissal of co-chief operating officer Warren Spector.

Markets came to head late July and early in August 2007 as concern mounted that mortgage securities may not have been as secure as people thought. Something I had written about months ago. Then came the August 6 bankruptcy of Melville, N.Y.-based American Home Mortgage Investment Corp. American Home, once the nation's 10th largest mortgage lender, claims it fell victim to "extraordinary disruptions" that effectively cut off funding it needed to make new loans. Falling U.S. home prices and a spike in payment defaults have scared investors away from mortgage debt, including bonds and other securities backed by home loans. Banks, by then, worldwide were looking at their portfolios and finding sizable exposure and hedge funds were closing down in an attempt to hold off investors who wanted to redeem their stakes. The result was a modern day run on a bank. France 's biggest bank, BNP Paribas, froze US$2.2 billion held in three funds citing their exposure to sub-prime prime mortgages in the U.S. That solidified fears that risk was spreading worldwide. With cash reserves running low, banks refused to lend to each other and the interest rates that banks charged each other rose well above the 4 percent level set by the ECB, prompting its unprecedented cash injections two days in a row. U.S. Federal Reserve and central banks in Asia quickly followed this strategy. Now we're in "Liquidity Crisis."

In the mortgage industry,

• 1
• 2
• 3
• 4
• Next Page >>