Reply #22: Let me attempt to explain..

[sendero]

... what is going on here. Anyone who feels I'm off base, please reply with corrections they will be appreciated.

First, what is happening now.

American Home Mortgage, a large and hitherto prosperous mortgage company, is effectively kaput. They will almost certain be filing bankruptcy soon, and there is little chance they will ever emerge from bankruptcy.

How did this happen? They specialized in mortgages for folks with credit 'just above' sub prime. As you know, sub prime is a fancy phrase for a credit rating that is weak to downright bad.

But even though they are theoretically operating "above" the sub prime market, their defaults have risen precipitously. This has caused the folks who have been supplying their working capital to make "margin calls", i.e. where a lender basically calls in the debt (expects full payment) because he no longer believes the borrow is credit-worthy. (I believe the AHM actually defaulted or was late on some payments owed to said lender).

When you are in the business of lending money, and the source of the money you are lending dries up, you are out of business.

Secondly, how did we get here?

Well, this could be quite a long section. The highlights include:

1) Lots of people buying houses they simply cannot afford

2) Lots of people buying houses with the expectation of continually and rapidly rising prices, an unrealistic expectation.

3) Lots of people buying houses with complex mortgages they don't understand.

4) Truly dumb people buying houses with Adjustable Rate Mortgages when fixed rates are already at historic lows.

5) A Federal Reserve desperate to flood the economy with liquidity (printed money) to stave off recession.

6) Rapacious mortgage companies staffed with folks who know damn well that the mortgage they are selling is a hugely bad deal/idea, but sell it anyway to make a buck.

7) An economy that has come under strain due to large increases in the price of oil.

8) Absurd real-estate price increases based on speculator activity.

And a host of other factors, but those are the highlights.