Subprime. Collateralized Debt Obligations. Liquidity. These are not uncommon words now a days. Every so often you hear them out of the mouths of people you wouldn't expect.

Everyone knows we're in a recession, the stock market plummets every time the price of a barrel of oil goes up. We are feeling the sticker shock, every time we go to the market, the gas station. For months people in Washington have been struggling to find ways to help the economy bounce back from these difficult times.

As if they had their heads in the clouds, or something, they couldn't see this coming? What happened to the booming economy? The housing boom? The bubble has burst and the average American is left to sweep the pieces under the carpet?

Many can blame the financial burden of fighting an ancient religious war or sticking our nose where it needn't be-let them figure it out right? But we've had a score to settle since 9/11 and this score has taken the focus from areas of the economy we should have been watching like a hawk.

The housing market, the boom of the late 1990s into this new millennium has caused people to become too comfortable. Even the banks grew more flexible, bent the rules for some that would be considered very high-risk. Interest rates were the lowest since post-World War II; FHA loans opened the doors to homeownership and other banks created a specialty niche for sub-prime customers.

Many homebuyers needed "no down payment" or less than the traditional 20 percent. This created a buyer's paradise, no longer were people hindered by less than perfect credit. Still what were banks and large mortgage companies thinking, that this boom would never end? Maybe they were too busy making profits hand over fist to care about the future and if such practices would have negative repercussions.

By the summer of 2003 the Federal Reserve had lowered the interest rate to 1 percent, which is practically unheard of and while the interest rates on various credit lines were higher, this move changed everything as far as momentum in the marketplace. Mortgage rates were a bargain compared to years before. This resulted in a refinance boom. Homeowners could not call their mortgage company fast enough. This caused banks to rethink further how loans are underwritten and funded.

It is like a double edged sword because on one hand there is a segment of the market that has been historically underserved and considered high-risk; on the other hand there are people who have maintained a prime credit rating and scrimped, saved to put a sizeable down payment on a home. What did not help matters was President Bush's Homeownership Initiative, which encouraged mortgage companies like Countrywide to write loans to risky customers. Still this action touched upon a segment of communities that were ethnic, diverse and always considered renters. Mortgage companies worked the notion of the American Dream with these people.

Another thing that was happening at the time was a somewhat illegal action called "Flipping." With the home values rising at an astronomical rate, everyone believed they could get rich quick by playing real life Monopoly. Not only did you see people buying homes for the sake of building wealth but also buying investment properties. Many people would buy homes in need of renovation in up and coming areas, in hopes of profiting from buying in the first place. What ended up happening in many cases was that people did not think about other intrinsic fees associated with buying home. They thought all they would have to do is pay the mortgage, not taking into account rising taxes, water bills and other maintenance.

This was the era of anyone being able to get a loan. This spawned hybrid loan products when before there was typically only the fixed rate mortgage, now there was the adjusted rate mortgage, or ARM, which many homebuyers did not understand, they just wanted the loan. The idea was give an at risk borrower an ARM and this would allow them to build healthy credit with hopes of refinancing into a fixed rate later before their existing rate adjusted to a much higher interest category.

To compound the logical thinking of this, it made sense because the home was only destined to appreciate in value, so banks were willing to lend up to 110 percent because the home or collateral would be worth more than that in a few years. This also worked to close doors for some homebuyers in areas where the living wage did not catch up to the housing value. This is why you see so many people leaving California because the housing is so outrageously expensive or the commute is too long. Still mortgage companies and banks were not thinking about the average American; they were too busy making money but this could not have happened without Wall Street.

How Wall Street Profited

Such riskier loans required a new way of pooling them in the market place. Banks and mortgage companies would sell them off to big pension funds, private equity firms, mutual funds, foreign investors and any other investors looking to profit from the housing boom.

This only opened the marketplace to complex, risky maneuvers and gone was a simpler time. In fact many borrowers did not understand exactly how any of this worked. In the good old days, one would visit their local bank where a relationship was established with the manager and a mortgage would be taken out. Still the logic behind the new system of collateralized debt obligations or CDOs is that by categorizing hundreds or thousands of mortgages together, the nature of the risk diminishes. Really what was thought at that time was the loss from nonpayment or foreclosure would be minimal.

Still one needed to be proactive in how well the investments were performing. For instance, one could start to see a trend toward a foreclosure situation. Let's say that if in one group of mortgages of about 1,000 homes, 40 of them are not paying on time. It is thought that this is not too bad because the 960 paying on time and the profit made there, allows one a return on investment despite the losses on 40 loans.

It is not the best-case scenario but a winning one for this example. It is when the numbers are upside down that one would start to see a loss and higher rate of foreclosure. What this created at the time was a safe investment in sub-prime paper dealings. It seemed brilliant really because it was a win-win situation for so many. For those once considered risky and underserved, the banks and mortgage companies were now able to offer them an option and meanwhile, investors on Wall Street turned a profit. Banks and mortgage companies got a good investment rating, leading people to buy their stock.

Still this behavior in the marketplace could not go on forever and wise investors, economic forecasters and business strategists should have seen a wave of change coming. The ARM loans started to reset at astronomical higher rates than when the homeowner took out the loan. Sometimes it was a matter of a few interest points but more often a matter of more than five, sometimes ten points. People started to default on their homes leading to Wall Street feeling less confident in the market. Next two very important things happened that many feel even today and scares some into thinking a new Great Depression is upon us.

First banks were no longer flexible and tighten their lending practices, essentially closing down the sub-prime market. This had a nasty effect on that segment of the population relying on such loans for buying a home. I mean many can say that the banks finally wised up that what they were doing was wrong. It was wrong for them to give loans out to people that had not demonstrated an ability to pay on time just for the sake of financial gain. This all seemed to snowball as recently as winter of 2007.

Second, without loans for buying homes, the housing market stalled. While many would say, it became a buyer's market; the truth was that not many could afford the existing inventory. Two out of four homes may be on the market, but people cannot seem to sell them because many of the buyers are no longer qualified. Wall Street also continued to suffer as the values set on the new system of selling high-risk loans depreciated as people started defaulting payments.

These investments were on books everywhere and as a result many companies that seemed strong and profitable, no longer had any worth. Many went out of business or continue to fail, leading to a change in business practices. As more and more bundles declined in value, the banks made fewer loans, as they grew wary of under performance. This in turn also made it more difficult for people to get other loans for automobiles, even credit cards. No longer was sub-prime booming. This changed the lending capacity for so many banks but also has decreased consumer spending especially if people with blemished credit cannot get further credit advancements. It is a terrible time to live with a credit score less than 650 because this climate makes it all the more harder to re-establish good credit lines.

Who really hurts, the bottom line, the truth of the matter is the average middle class, working class person and the family owned business. A mom and pop company who years ago had a good working relationship with their local bank will find less credit options for expansion because of what has happened with the housing boom. On the other side of the coin, larger conglomerates are finding it harder to assess their assets for acquisition of weaker companies in need of merger.

Many can argue that the Federal government has not done enough to help this situation rebound. The Federal Reserve has taken steps as recent as fall of 2007 to make it more affordable for people to borrow. The interest rate has not fluctuated much but still this has allowed banks a more direct relationship with the Fed. What is curious about the situation is that people are just really paranoid and lack confidence in anything right now. Even powerhouses like Bear Stearns are being questioned, people are pulling money out of the stock market and hiding it under their mattresses. Freddie and Fannie are in trouble and I think as much as people cry "Recession, recession" there are signs of Depression within the economy no one really wants to admit. When banks start to fail, that's when people need to definitely worry.

Home Prices
As mentioned earlier, the housing market is in recovery. Housing prices have dropped a little bit. There seems to be an abundance of homes on the market rather due to foreclosure or people wanting to downsize, the market is still in a state of crisis. As much as the Realtor Association wants everyone to believe that a home builds personal wealth, there is no guarantee. What happens to people who are still trying to afford too much home? Or the at-risk consumers? Lenders have changed the criteria for borrowing and as a result there are less buyers. It is ironic because at times like these, of course, people will want the stability of a home. Maybe in the near future as housing prices continue to fall, there will be more action but one must remember there are other forces at work predicting the economy: war and politics being highly important right now. I think many are waiting to see the outcome of the Presidential elections in November.

Also it must be remembered how far reaching the burst of the bubble has been. It has affected whole job markets. Anyone having to do with the lending process has suffered, not only loss of income but displacement within the workforce. No longer are real estate agencies hiring, there are not many loan officer positions anymore but also one cannot forget the homebuilders and other craftsmen are a part of the full picture. Places like Home Depot and Lowe's have seen a decrease in home improvement projects and people are hesitant to purchase big-ticket appliances. And this makes perfect sense if homes are worth less, why invest any more?

Recession Watch

Well in a nutshell, that's the 411 on the housing market and the world of Wall Street. No wonder we're talking about a full-scale recession hitting all parts of the economy because after reading this, one can see a definite relationship. The economy is such a touchy subject because it is like the death of an important family member; no one can believe the good days are gone. It is extremely difficult for the American consumer to remain confident when everywhere you turn the price of everything has increased a nickel, a dime and even a quarter over night. It is down right scary because so many are working at the same wage rate. Even so, many are unemployed, under-employed or working at home because the job market cannot pay them what their education warrants. These are terrible times. So how can one get past this bad feeling? Work harder at saving and maintaining their greatest asset: home and family. This feels like a no-win situation as home values continue to fall. People feel down in the dumps so they spend less and try not to use credit cards. What really hurts is that many are needing credit now to buy perishable items like food and gas.




There is no doubt we are in recession and possibly heading toward a depression. The Bush Administration has lacked authority in addressing when the recession began but many are comparing this present situation with that of the late 1970s. People's fears are ruling their pocket books and this is why we see an economic downturn but what about the failure of so many financial institutions? How do you label that? It just seems unfair that the rich seem to get richer and the poor suffer. It is the working middle class that bears the brunt the most. There is no doubt, there needs to be a change, some sort of economic stimulus and not in the form a $300 check but some real down and dirty work to save ourselves.