The current financial crisis originated in America with a wave of defaults in “sub prime” mortgages. The excellent presentation found here covers a lot of data in a lot of detail (step through the slides), and shows why there is more pain ahead in the American mortgage and housing markets.
The companies making crazy loans didn’t care very much if the homeowner ended up defaulting for two reasons:
1. Either they didn’t plan to hold the loan, but instead intended to pass it along to Wall Street, which would bundle, slice-and-dice it and sell it (along with any subsequent losses) to investors around the world;
2. Or, if they did plan to hold the loan, they assumed home prices would keep rising, such that homeowners could either refinance before loans reset or, if the homeowner defaulted, the losses (i.e., severity) would be minimal.
I guess we all know how well that turned out. And some of those “investors around the world” are right here in NZ…