The bursting housing bubble and the subprime mortgage meltdown can no longer be contained, and one question remains: How damaging will the fallout be? Every sector of the economy will be affected, as well as economies in other countries. We don’t know where the bottom will be.
The experts predict that things will get much worse before they get better. Inflated housing prices and onerous personal debt were encouraged by predatory lending policies, and now the balloon is bursting.
How did this all happen? Well, home loans were bundled together and sold as securities. These securities, known as CDOs, or collateralized debt obligations, were sold and resold on the open market. The buyers purchased these financial instruments because the monthly mortgage payments represented a regular flow of funds, and based on the underlying worth of the real estate itself. But the flow of funds and the worth of the real estate have not held up as expected. So investors don’t really know what their widely traded mortgage-backed securities are worth. And if they do try and sell these CDOs, a lack of offers could result in a meltdown in these securities, putting further downward pressure on the market.
Read how the foreclosure industry gets worse...
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