As many exchange traded funds (ETFs) have suffered from the subprime mortgage meltdown, investors are looking for whom to blame. In this case, there is no one entity; Central banks, homeowners, lenders, credit-rating agencies, underwriters and investors’ behavior are collectively responsible. Here’s a look at how some of the key culprits contributed:
When the economy was down from the dot.com bubble burst in 2000 and the terrorist attacks of Sept. 11, central banks injected money into the banking systems to stimulate the economy. With all the extra liquidity in the market, investors sought higher returns through riskier investments, explains Eric Petroff for Investopedia. History shows that extra liquidity tends to create bubbles in the market.
Again, with the added liquidity to the market, homebuyers increased their risk by buying houses that didn’t match their budgets. They were able to buy the houses on special mortgages that offered low introductory rates and no down payments. Investors thought as their homes appreciated, they would be able to refinance at lower rates. However, when the housing bubble burst, it caused homes’ value and price to drop sharply. This meant homeowners had to refinance their homes at higher rates, which many could not afford. This has resulted in record foreclosures that are likely to continue.
Mortgage originators (lenders) also took advantage of the extra liquidity by approving people with poor credit and a high risk of default. Subprime mortgage originations swelled from $173 billion in 2001 to a record level of $665 billion in 2005, which is almost a 300% increase.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.