I recently posted a letter, "Boss Hog Bail Outs!" justifying why we should bail out the sorry homeowner. However, as we get past this, we need to understand what happen so that the same mistakes don't happen again. The BBC has a good article called The US sub-prime crisis in graphics.
The US sub-prime mortgage crisis has lead to plunging property prices, a slowdown in the US economy, and billions in losses by banks. It stems from a fundamental change in the way mortgages are funded.
Traditionally, banks have financed their mortgage lending through the
deposits they receive from their customers. This has limited the amount of
mortgage lending they could do.
In recent years, banks have moved to a new model where they sell on the
mortgages to the bond markets. This has made it much easier to fund additional
But it has also led to abuses as banks no longer have the incentive to
check carefully the mortgages they issue.
How it is suppose to work ...
How it can go wrong ...