In early 2007, I researched an article I was writing for someone's website on how to qualify for a home mortgage loan. That is, I was checking out the various rules of thumb and criteria that banks and other lenders used to evaluate people applying for home loans, and then either approve or deny their mortgage applications.
I'd gotten a lot of good info on these various financial ratios and was about to stop researching and start writing the article, when I came across another source of info that was... quite disturbing.
In retrospect, however, I was not nearly as disturbed as I should have been.
As I would have been, had I realized all the implications.
The article, written by an insider in the mortgage industry, basically said that all the traditional standards banks had historically applied to evaluate mortgage loan applications (and which I'd just spent a few hours looking up!) had, in actual practice, been thrown out the window.
The mortgage industry was in a "nudge nudge, wink wink" mode. If you claimed to have enough income to pay your monthly note, your mortgage loan was approved. Period. Even if you had a very low down payment. Even if you had no downpayment whatsoever.
At the time, I was disturbed simply because I'd previously applied and been approved for two home mortgages, and had had to go through a lot of red tape to prove my income, my credit worthiness, where my downpayment came from, and so on.
It just plain didn't seem fair to me that just because interest rates in 2007 were so much lower than they were when I bought houses, that people didn't have to come up with a downpayment, prove their sources of income or even have good credit scores.
However, it explained what I'd seen in my day job -- mothers with little or no income of their own buying houses because they had children on Supplemental Security Income (SSI). That's a form of welfare.
The mortgage industry was so crazy that women could get mortgage approved on the basis of receiving a government check on behalf of their children. (Incidentally, that check is intended by the law to take care of the children not to buy houses for their mothers.)
I didn't realize that I was looking at information that, before long, would:
Change the face of the largest Wall Street financial institutions -- taking down ALL 5 investment banks.
Transform and vastly increase the role of the United States Treasury Department and Federal Reserve.
Make every book on bonds obsolete when it came to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), as both companies had to be seized and put under conservatorship by the federal government
Make even ordinary money market mutual funds look like unsafe investments (Reserve Management Company's Prime Fund actually "broke the buck" (went down in value to 97 cents) -- because it held a lot of commercial paper from suddenly-bankrupt Lehman Brothers -- sparking a flight from prime money market funds ($500 billion) to treasury money market funds -- $380 billion).
Force the U.S. Federal Reserve to tap into the little-known Exchange Stabilization Fund to lend money directly to U.S. companies -- the first time it's done that since the Great Depression. But the short term cash many companies depend on to do business has been drying up with the credit markets and money market fund problems (money market funds held 40% of the outstanding short term commercial paper of U.S. companies).
Force the passage of the most massive taxpayer-funded bailout bill in history (though since dwarfed by President Obama's even more massive taxpayer-funded bailout bills).
Cause the Dow Jones Industrial Average to drop to a level (9400 on October 7) it first passed up in March 1999. That's down right about 1/3 from its all-time high of 14,093.08, which it reached the week of October 8, 2007. (It's since rallied, but in March 2009 broke below 7,000).
Cause the failure and near-failure of banks (Washington Mutual, National City, Wachovia) and insurance companies (American International Group) in the United States.
Cause the failure and near-failure of financial institutions around the world. Iceland took over its second largest bank, Landbanski. The United Kingdom put together a 500 billion pound financial rescue package. The UK took over lender Bradford & Bingley. The giant Dutch-Belgium bank Fortis had to be partially nationalized. In Germany, Hypo Real Estate was given a 35 billion euro bailout.
Force central banks from the EU to Sweden to Japan to Australia to China to the United Kingdom to Switzerland to Canada to lower interest rates.
Force the U.S. government to suspend short sales of 950 financial-related stocks.
Possibly changed the outcome of the November 2008 United States presidential election. John McCain was leading the polls until September 2009 when this crisis really hit the fan. Pollsters found that independents blamed him, as a Republican, for the financial crisis.
Cause stock markets around the world to fall. Russian and Indonesian stock exchanges had to be closed down.
Make it MUCH harder -- and more expensive -- for both individuals and businesses to get loans.
Threaten the United States and the world with economic recession or depression.
Although the news media keeps claiming we're entering a recovery, we're still at great risk.
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