By M. Jarsulic

An indepth examine the origins and improvement of the present monetary predicament, from an economist and Washington insider. Jarsulic explains how a wide range of economic associations, together with loan banks, advertisement banks, and funding banks created a credits bubble that supported nonprime personal loan lending and helped to inflate apartment prices.

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Extra info for Anatomy of a Financial Crisis: A Real Estate Bubble, Runaway Credit Markets, and Regulatory Failure

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6 But by July 2007 there were impossible-to-ignore signs that something really dreadful was underway. 7 More downgrades of subprime securities followed. The reason for the downgrades was distressingly simple. The pools of mortgages backing the RMBS were not performing as investors or the ratings agencies had anticipated. Higher than expected defaults and foreclosures on mortgages meant that the revenues to RMBS bondholders could easily fall below the levels promised. That meant that the ratings of those bonds, which ref lect the likelihood of loss to the bondholder, had to be adjusted downward.

1 Collateralized Debt Obligations Subprime mortgage-backed securities were purchased by a wide variety of investors, but one important source of demand, especially in the latter years of the subprime credit boom, were the issuers of collateralized debt obligations (CDOs). CDO securities are synthesized from other securities: issuers take a collection of debt instruments, pool them, and use them as the basis for a new set of securities. 2— Structured finance CDOs). Structured finance CDOs securitize collateral that has already been securitized.

The end to rapid home price appreciation sparked the subprime and Alt-A foreclosure wave. During the price run-up between 1997 and 2006, weak nonprime borrowers who would otherwise have defaulted on their loans were rescued by a deus ex machina. Rising prices created home equity where there had been none. That equity allowed them to pay off their mortgage, or to refinance into a new one. However, once price increases came to an end, equity creation ceased and foreclosure rates among nonprime borrowers had to rise.

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