Old Story:
Once upon a time there lived a cloth merchant in a village with
his wife and two children. They were indeed quite well-off. They had a
beautiful hen which laid an egg everyday. It was not an ordinary egg,
rather, a golden egg. But the man was not satisfied with what he used to
get daily. He was a get rich-trice kind of a person.
The man wanted to get all the golden eggs from his hen at one single go. So, one day he thought hard and at last clicked upon a plan. He decided to kill the hen and get all the eggs together. So, the next day when the hen laid a golden egg, the man caught hold of it, took a sharp knife, chopped off its neck and cut its body open. There was nothing but blood all around & no trace of any egg at all. He was highly grieved because now he would not get even one single egg.
His life was going on smoothly with one egg a day but now, he himself made his life miserable. The outcome of his greed was that he started becoming poorer & poorer day by day and ultimately became a pauper. How jinxed and how much foolish he was.
Moral: One who desires more, looses all. One should remain satisfied with what one gets.
The man wanted to get all the golden eggs from his hen at one single go. So, one day he thought hard and at last clicked upon a plan. He decided to kill the hen and get all the eggs together. So, the next day when the hen laid a golden egg, the man caught hold of it, took a sharp knife, chopped off its neck and cut its body open. There was nothing but blood all around & no trace of any egg at all. He was highly grieved because now he would not get even one single egg.
His life was going on smoothly with one egg a day but now, he himself made his life miserable. The outcome of his greed was that he started becoming poorer & poorer day by day and ultimately became a pauper. How jinxed and how much foolish he was.
Moral: One who desires more, looses all. One should remain satisfied with what one gets.
Old story in the present context - Sub-prime crisis:
What are subprime mortgages?
- Typically, those who qualify for the most ideal mortgages with the best interest rates are those with good credit scores and minimal debt.
- A subprime mortgage is a type of loan granted to individuals with poor credit histories (typically below 600), who would not be able to qualify for conventional mortgages.
- Subprime mortgages charge interest rates that are above the typical interest rate because of the risk that is involved on the part of the lender.
The Subprime Mortgage Crisis Explained:
Up until 2006, the housing market in the United States was
flourishing due to the fact that it was so easy to get a home loan.Individuals were taking on subprime mortgages, with the
expectations that the price of their home would continue to rise and that they
would be able to refinance their home before the higher interest rates were to
go into effect. 2005 was the peak of the subprime boom. At this time, 1 in 5 mortgages was
subprime.
However, the housing bubble burst and housing prices had
reached their peak. They were now on a
decline. At this point, many who had taken on these subprime
mortgages and their interest rates were beginning to “reset” to the higher
rates, making their monthly mortgage payments much higher than before. People then began to sell their homes – but there was a
problem to do this. Since the price of
homes had severely decreased, they did not have enough money after selling to
cover the amount of the mortgage. If a
person could not sell their home, this ultimately left the homeowner with one
option, and that was to DEFAULT.
When a home is defaulted, this is the first step towards
foreclosure. After the notice of default, there is a reinstatement period
before the home is put up for auction by the bank. If the defaulted loan isn’t taken care of in a given amount
of time, the bank resumes responsibility of the home and is put up for
auction. However, when put in an
auction, the bank usually sells the home at a price that is much lower than
what it is worth. The amount that they
receive in this process gets put towards the borrower’s loan, but the borrower
still has to account for the difference that they owe towards the loan. The process of auctioning off these houses creates a
increase in supply of homes in the market, which would decrease the home
prices. One of the major problems that
came out of this crisis was that: Billions of dollars were lost in mortgage
backed securities.
What is a mortgage backed security? “Once a bank has made
thousands of mortgage loans, they often package up all the loans together and
sell them to investors as bonds.” It was believed that these bonds were very safe investments
due to the fact that home prices were on the rise. If an individual was unable to pay the
mortgage, it was thought that the homes would easily just be seized and sold. Investors continued to buy these mortgage backed securities
because they continued to make a great amount of money.
However, real estate prices began to fall, and the
homeowners began to default their mortgages. This “safe” investment was turning
out to be one that was of great risk and therefore, costing investors billions
of dollars. The ratings of mortgage
backed securities began to decline, to AA or even lower. This was a clear indicator of how these
securities were thought of as a risky investment.The downgraded mortgage bonds were suddenly worth much
less. A bank who was initially holding
$100 billion in assets found that these assets could now be sold for much less,
assuming they could even find someone to buy them. No investors wanted to take on this risk,
resulting in ‘Sub-prime Crisis’.
Again the same Moral: One who desires more looses all! If people in a Nation are greedy, the Nation goes bankrupt.
Source: Allison Keith & Carly Mueller
Source: Allison Keith & Carly Mueller