I spent my last 10 working years working in the mortgage industry. My job was programming databases and mining the information in them. As a result I probably understand what is happening in the mortgage industry better than most people.
Back in the old days when you wanted a mortgage you went to your own bank, and if they had money to lend, you got a loan and they kept that loan in their own portfolio and serviced it themselves. Sometimes they sold off parts of the portfolio, but mostly they kept it themselves. That is not what happens now, especially in the sub-prime market.
Basically what they do is bundle the loans in what are sometimes called Conduits and then sell them, like a group of bonds, to investors. But unless you are spending years looking inside the Conduits, you don't understand what is happening with them.
There are multiple groups getting sub-prime loans. There is one group, and even experienced executives don't know this group exists, that get a month or two or even occasionally three months AHEAD of their payments and stay there as long as they have the loan. A second group will pay all of their payments on time and once they have gotten their credit back to a good level will immediately refinance. And in the sub-prime second mortgage Conduits, there will be a group that had very short term loans. In all three cases these are your best servicing clients. They don't require any work from the collectors. No one even knows they are there, until they fall off the books because of refinancing, or because they have paid off their loans.
Even when the loans aren't second loans if the Conduit is made up of old and new loans, you can have a bunch of loans fall off the books because the 15, 20 or even 30 years are up less than 5 years after the Conduit was put together.
What does that leave in the Conduit. It leaves the people who are NOT paying their bills. It also leaves loans where both of the borrowers are dead and the first mortgage has forclosed and resold the house. And yes, I worked in a servicing company where quite a few of the loans on our books did not have living borrowers. It is very hard to collect money from dead people.
And that is why the Mortgage and Financial Industries are a mess. If they had bunches of mortgage securities they were in trouble BEFORE the housing market got messed up and house prices began to fall. But most of the banks and insurance companies who had bought mortgage securities didn't have a clue as to why those securities were a mess. Certainly the very experienced executives I worked for did not know what was going on inside the Conduits until I started telling them. They didn't know about the people (about 30% of the loans) who consistantly paid ahead and they didn't know about the dead borrowers either.
Yes, that's what I've had trouble understanding: how SO MANY people managed to not pay their loans. DO you think there was also a lot of speculating, flipping, second home buying etc with balloon mortgages? And if so many people couldn't pay mortgages - what about the millions who can't pay CREDIT CARDS? It's scary.
The last few years mortgages were so easy to obtain. Before, purchasing our home we were pre-approved up to a $600,000 mortgage, which was way out of our budget. Sadly, there were many people who thought since they were approved they could afford it, NOT. There a numerous homes for sale or in foreclosure in the town I live.
What briegull and Kandee said are also true, but what even the experienced financial people DO NOT KNOW is why the conduits (also called mortgage bonds) are falling apart about 5 years after they were put together. That has nothing to do with the housing market. It DOES have something to do with people being approved for loans they couldn't possibly pay off on a long term basis. And that problem exists both in the sub-prime and the prime mortgage markets.
The credit card mess is totally different because they are being serviced by the same people who approved the card in the first place. So the hidden problem isn't there.