Subprime mortgage primer -- online comic

When stuff gets complicated, I rely on profanity-spewing stick figures to explain it to me in terms I can understand. This 45-page online comic explains the subprime mortgage mess in about 2 minutes. The Subprime Primer

Mark Frauenfelder is the founder of Boing Boing and the editor-in-chief of MAKE and Cool Tools. Twitter: @frauenfelder. Come and hear Mark speak at the ALA conference in Chicago on July 1.

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Narual

I think my buddy who works on wall street sent this to me in January or February as an animated powerpoint.
JakartaSlim

Nice comic, but they forgot the part about Fannie and Freddie. You know, the part where our gov’t forced lenders to go out and write risky loans to people who wouldn’t otherwise qualify.

Th pctr f McCn (wh trd t rfrm ths mss) shld hv bn rplcd wth Chrs Ddd, Brny Frnk, Frnkn Rns nd ys, bm.
Church

Dp:
http://www.boingboing.net/2008/02/26/subprime-primer-stic.html
SamF

I don’t know if they were so much “forced” to write risky loans, so much as “encouraged” to. The financial industry is, by nature, a greedy industry. So when given the opportunity to make loans to people that they knew would probably not be able to repay them, they figured it was a win-win situation. They either get the loan payments and rake in the interest, or they get the house and sell it for more than they originally mortgaged them for.

@8:Ugly Canuck, I don’t see anywhere that Jakartaslim made any even “not-so-hidden” racist comments. There are plenty of white people who are in way over their heads, too. And I don’t really see how giving risky high-interest loans to people who can’t repay them just so that they can pretend to own a house could be called compassion.
Metlin

Nice comic, but they forgot the part about Fannie and Freddie. You know, the part where our gov’t forced lenders to go out and write risky loans to people who wouldn’t otherwise qualify.

It’s fairly old, and I remember reading it way before Fannie and Freddie collapsed.
Don

I’ll leave the bickering over “forced” loans to others, but while the loans themselves are the “bottom line” of this disaster they were by no means an inevitable cause, or at least not in the way they ended up shaking out.

The making of bad loans is a questionable practice for the lender, but in and of itself it’s not too horrible a problem – while some percentage will fail, the majority won’t. Even with the unbelievable number of foreclosures going on now that’s still not enough to explain this nightmare. In January the number of homes in foreclosure was about 1 in 157.

Assume that 30% of the homes in the US are owned free and clear – a number I just extracted from my lower torso – making that closer to 1 in every 100 financed homes in foreclosure. Ignore the fact that simply being in foreclosure isn’t a certainty of failure and pretend that means 1 out of 100 of those houses is going to be vacated and the bank will take ownership.

Given those assumptions let’s pretend we were the lender for 100 of those houses and they only cost $100 each. We lent everyone 100% of the purchase price over a 30 year term and are charging them 2% interest – we’re very cheap.

At the end of the year 1 of the 100 have completely screwed up, gotten drunk, burnt down the house, salted the earth, desecrated the Indian burial ground the home was built on top of, and generally insured that there’s no way we can resell the repossessed home for even $1. We are out that $100.

But the other 99 have made their $0.37 a month payments, and we’re on target to collect $133.20 from each one of them over the lifetime of the loan. Our $10,000 investment will bring in $13,186.80 even after absorbing that total loss.

That’s not a good return over thirty years. It doesn’t even keep up with the average for inflation. But it doesn’t begin to resemble something that qualifies as an event that should put the world into a tailspin.

The real crux of the problem that these loans have caused is that such a tremendous number of them were made and then bundled into securities which were THEN rated way higher than they deserved to be, which meant they got bought by people and funds that should never have purchased them. That’s bad enough, but the subsequent crisis in confidence amongst people who would otherwise be buying these securities means that creating and selling new securities becomes hard or impossible, causing all kinds of cascading problems.

If you want to lay blame at someone’s feet, it belongs with the people who falsely rated these turds as better than they were. There’s nothing wrong with risky debt – chances are there are some people reading this who have played with Prosper, for example – but these bad ratings resulted in these turkeys being bought by things like money market accounts which are prohibited from investing in anything but the highest rated securities.

Thus the recent talk about MMAs “breaking the buck,” a theoretically possible thing that to the best of my knowledge had never happened before in consumer accounts. It’s this kind of domino effect that’s the problem here, not bad mortgages.
JakartaSlim

You’re simply wrong Stefan. The gov’t did indeed force lenders to make risky loans.

Franklin Raines, the Clinton-appointed former head of Fannie Mae from 1998 to 2004, made it his top priority to make mortgages easier to get for people with poor credit, few assets and little money for a down payment.

The current financial crisis stems in large part from the fact that people who shouldnâ€™t have been buying a home, or who bought more home than they could afford, now canâ€™t pay their bills.

If you choose not to believe me, fine… How about believing the extreme right wing newspaper the NY Times?

http://query.nytimes.com/gst/fullpage.html?pagewanted=all&res=9E06E3D6123BF932A2575AC0A9659C8B63
Astin

@Kleer001 – Then they go bankrupt. The mortgages are LOANS, with the house as collateral. If you simple nullify the mortgage and give someone the home, then you’re effectively handing them hundreds of thousands of dollars for free and the lender loses that money. As long as you have a mortgage, you only own your home as long as you keep paying the loan.

This is why the calls for mortgage forgiveness and stopping foreclosures is terrible economic policy. Best case, you work out new terms that the homeowner can afford, be it a longer term amortization period, lower rates, or accelerated payments (smaller amounts more often).

@SAMF – Mortgage lenders seldom get even market value for a home. Forclosed properties often go at a substantial discount, because the bank is simply tryin to recoup the loan. In the current market, where many homes are upside-down (worth less than the mortgage), nobody makes any money on a sale. What the lenders were hoping for with the sub-prime mortgages was that enough risky borrowers would turn out to be okay and their higher interest rates would cover the losses of the bad mortgages. They didn’t expect the problem to be this massive. Granted, this was due to greed and a severe lack of honesty with themselves or foresight on their part.
Stefan Jones

What about McCain, Mr. GOP talking point dispenser?

The head of his campaign has been getting a $15,000 a month payment from Fannie & Freddie since 2005. Well, he did stop when such payments were forbidden. Last month.

And the 2002 Republican Party Platform includes a specific program for increasing home ownership in minority communities. They were pushing the “ownership society” even more forcefully than the Democrats.

The government didn’t force lenders to do a damn thing.

And the current crisis has more to do with the fantastic amount of leverage based on these shaky mortgages, and shady instruments like credit default swaps.
JakartaSlim

It’s amazing how quickly someone gets labeled a racist when one raises an alternative view.

Oh, here’s a really concise explanation.

http://www.youtube.com/watch?v=VgctSIL8Lhs
JakartaSlim

“….your not-so-hidden racism oops I mean lack of compassion for the poor sickens me….”

Hmmm… hey UglyCanuck

Please explain how giving a mortgage to someone (regardless of color, religion, race) who cant afford it is a compassionate thing to do?

So, now these poor people are also saddled with bad credit histories.

Yeah, that’s real compassionate.
minTphresh

no one seems to want to address the issue of the OBSCENE profits of the oil co.’s, and the effects it has had on the economy as well. with an average net profit of fifty BILLION per co. per yer since 2001 ( that is sheer profit folks!) there is a good $400,000,000,000 ( per oil company) that doesn’t seem to be ‘trickling down’. and now mr. mccain wants to give them even more ‘tax breaks’. WTF?
kleer001

What would happen if the mortgages were nullified, if the property was just given to the people that were paying the thing off?
Luke1972

This was floating around on emails as a pps a while ago. Odd thing was is an Econmics professor sent it to me and he told me he is planning on using it on his new class of freshman this autumn!
bjacques

Right, Jakartaslim, and the Democrats also forced the suffering mortgage companies to repackage the loans as collateral and then trade them on the market. Curse those Democrats!
Ugly Canuck

Jakartaslim: Yes, the people in Power have nothing to do with this other than their misguided attempts at helping black oops I mean poor people…helping black oops I mean poor people caused the investment banks to fail, no doubt, caused them to be hyper-leveraged and unregulated….but your not-so-hidden racism oops I mean lack of compassion for the poor sickens me.