Essay: Mortgage Backed Securities
Mortgage-backed securities is where by a lender calculates a loan facility and sells it a third party. This arrangement removes the responsibility or future default from the lender. When lenders are allowed to do this business it means more money to lend. The onset of interest only loans and mortgage-backed security meant so much money was in circulation, which lead to a boom in the housing business since people had money to buy the houses. Those who did not have the money had the opportunity to borrow from the lenders.
When the subprime borrowers realized that they could not sell their houses at a profit and thus started to default their payments then that was the beginning of the real estate downturn. Initially the problem seemed to be only about real estate but come March 2007 the reality started to sink in. the lenders had spent lots of money lobbying for the relaxation of laws restricting borrowers from taking mortgages they cold not afford.