Lowell Deeds

The latest on real estate recordings and new technology from the Middlesex North Registry of Deeds in Lowell

March 21, 2008

Understanding High Finance

by @ 1:22 pm. Filed under Archived, Real Estate

In the opening line of his Economic Scene column in this Wednesday’s New York Times, David Leonhardt writes “Raise your hand if you don’t quite understand this whole financial crisis.” He goes on to explain that even the people who created this mess don’t really understand it, and makes a valiant and useful attempt to lay out the various factors that have brought us to this point. One of the biggest factors was the huge amount of money that was floating around looking for investments with high returns. Traditionally, an investment based on mortgages has been considered quite safe (”fixed income”) and provided competitive returns. While extremely low interest rates made refinancing so attractive, they also made mortgages as an investment less attractive. That’s where subprime mortgages with their higher interest rates come in. Because the borrowers were such poor risks, lenders would routinely charge higher rates - that’s nothing new. But the higher rates made these much more attractive vehicles for investors and this is where the system fell apart. A year or so ago, the Lowell Sun ran a front page profile of an individual who was on SSI, taking in about $300 per month, who qualified for a loan with an initial monthly payment of $1200 at a very high rate of interest. Who in their right mind would have considered putting up the money for that mortgage a wise investment? No one, but package that mortgage up with hundreds of thousands of like risk, and they suddenly become a magnet for those seeking higher returns.

In explaining the situation, Leonhardt recommends a book by Charles Morris. Last night I was at Barnes and Noble, so I asked the help desk if they could assist me. I asked for “The Billion Dollar Meltdown” but they had trouble finding it. The title is “The Trillion Dollar Meltdown”, a distinction that really says it all.

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