Research Pit

[Starshine]

It all got started in a word - GREED. When something - this time the housing mkt - is on a bull run, the lenders didn't have to be too picky about who they qualified for a mortgage. So they put people who wouldn't ordinarily qualify into mortgages like ARM's or No Money Down/Interest Only loans. That works fine as long as the housing mkt keeps going up. If the mortgagee walks away, the lender can get the house back and still recoup his investment. But interest rates were raised like 16 or 17 times and the interest rates on these loans also went up to the point where people can't pay it any longer. Now there is no mkt for the lender to sell into.

Add to that the fact that they tied these sub-prime loans into mortgage backed investments like CMO's, etc. Well, the hedge funds ate them up because they paid a high interest rate. Now, with all the foreclosures, the hedge funds can't adequately "price" these CMO's and whatever else. So the hedge fund investors are saying "I want my money back out of the fund" and the fund is saying "We can't give you your money back because now we don't know how much the fund is worth". So they're closing the funds to redemptions.

We all know that in a bull run, everything works just fine. But you need to remember that somewhere, somehow you need to pay the piper. Wall Street's engines run on greed and fear. We had the greed with shady lending practices and destructive hedge fund practices. Now we're on the fear side of the equation. And it won't be over for a while.

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