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those who loaned the money could basically lie and make up anything they wanted to, to allow said potential home owner to sign off on a contract that was presented to them in a fraudulent way.
After which, these loans, known as subprime loans (because they were let to people that had a subprime credit rating), where then bundled together and sold to banks, who then sliced them up into Tranches (sp). These Tranches (sp) were then offered to the wealthy as good investment vehicles to basically make free money. It was based on the fact that over time, the majority of the people paying off the loans would actually pay them off and then generate interest for the wealthy investors.
However, the the subprime lenders committed a lot of out right fraud. Some with the knowledge of the people borrowing the money and some that didn't(actually most had no idea they were being duped).
Now these fraudulent loans were Adjustable Rate Mortgages. That means every one of these loans resets periodically as per the contract specifies. Some people who got these loans were out right lied to when asking if these loans were fixed and or if they would reset.
So several months would go by and what would appear as if being out of the blue, the interest rate would reset to a higher rate. Most of the times it would drive up the monthly mortgage amount to the point that the person, who took out the loan, could no longer pay.
When you have enough of these, the Tranches (sp) investment vehicles that the rich invested in, become basically worthless.
The Tranches were based on the fact that if you bundle together both high, middle and low risk, in the end, the wealthy could make a load of money on basically imaginary money. But there was a catch. What if all the loans defaulted and all the people who took out the loans either declared bankruptcy or had their house foreclosed? In normal times, it would it would work, but somewhat like geometric progression, when more of these loans when out to subprime credit risks, it started as you will "a run" on investing in real estate.
Because, the subprimes made it really easy for anyone to buy a house, so some people were buying as many as a dozen condos, in hopes of flipping them to a higher return.
The problem here was, so many people who took out mortgages on these houses and condos, didn't have the income, purposely lied on the application with the lenders okay and bought to much then they could ever possible afford. So there was a glut of unsold houses priced beyond normal realms.
So when people started defaulting on their mortgages and going into foreclosure, the value of the houses went down, because the demand for homes stalled and dropped due to not enough prime holders of credit.
So those who had homes valued much beyond what it was actually worth, found themselves "underwater". Meaning, the house was worth vastly less than what they paid for it.
People walked away, foreclosed and declared bankruptcy. And the Tranches, basically became worthless. When the tranches became worthless, this meant that the capitol that the investing banks were "banking on" to support the tranches vanished, because it was never there to begin with.
Banks were suddenly scarily short of capitol. Banks began to fail because they couldn't fulfill their obligations to their investors.
And to make a very very long story short. The deregulation of the banking and real estate industry made this all possible.
And thus began the great new regression.
I know this wasn't sort and sweet and I probably repeated myself a few times and I maybe slightly off in my logic, but that's basically it.
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