Sub prime crisis wat is it ALL abt?

This is the "short" version.

When interest rates were low, from around 2001 to 2005, mortgage interest rates, which are based on bank interest rate, were also low. Prior to this period, most mortgages for homebuyers were fixed rate mortgages, where the interest rate the homebuyer pays stays the same for the life of the mortgage.

Part of getting a good fixed rate involved comparison shopping between banks and other lenders, but part also involved having a decent credit rating. If your personal credit rating is low, you are considered a "sub-prime" candidate for a loan.

During this period of low mortgage interest rates, banks and other lenders started offering variable rate mortgages, where the interest rate (and your monthly payment) starts out low, but after the first few (typically 3 or 5) years, the interest rate goes up. Many people bought these mortgages because they a) were buying a house they thought would go up a lot in price, and then sell it, or b) thought their income would go up, allowing them to afford the higher rate later, while their current lower income would allow them to afford a more expensive home than they could buy if they got a fixed rate mortgage.

Got all that so far?

Now, what they didn't expect (and I still don't know why not) is that the cycle of real estate going up rapidly in price would eventually end. When prices for any commodity rise due to speculation, eventually, you get what's called a bubble, and within some period after the bubble peaks, it bursts. This has happened with every speculative commodity in history - tulips, silver, gold, real estate (in the early 90s), dotcom companies, and, once again, real estate. Gee, I'm so shocked.

Anyway, once the bubble burst, and the economy slowed down, and people lost their jobs, or moved to lower paying instead of higher paying jobs, they were stuck with higher payments AND less income (or maybe the same income they started with) instead of more income. Suddenly, they couldn't sell the property, because it was priced lower than what they paid for it, or they payments simply went up too much, and they weren't prepared for it. People with fixed rate mortgages didn't have this problem, because their payment basically remained the same, or increased slightly due to reasons other than their mortgage rate (tax increases), but people with these "great" initial rates from a few years ago were now facing the higher rates they though they could either afford (with their much higher income) or dodge (by selling their property). only they didn't have the higher income, and couldn't sell the property.

So, people start defaulting on their mortgages. Losing their homes. And, because in many cases those mortgages have been sold off, as part of bonds call RMBS (residential mortgage backed securities - a financial instrument created to allow rich people, and institutions like pension funds with money to invest, to make more money), those bonds are no longer worth as much as they were when the bondholders first bought them. So those people are losing money, in some cases, a lot of it. So, to one degree or another, the banks that sold the mortgages, then bought and sold the bonds, are getting hurt because the sold the wrong type of mortgage to people who should have had enough sense to buy within their means.

Alot of people are going to lose their home/