This is the turning point.
So, just like always, the mortgage broker connects the family with a lender,
and a mortgage. Making his commission, the family buys a big house,
the lender sells the mortgage to the investment banker,
who turns it into a CDO,
and sells slices to the investors and others
this actually works out nicely for everyone and makes them all rich.
No one was worried because, as soon as they sold the mortgage to the next guy, it was his problem.
If the home owners were to default, they didn't care:
they were selling off their risk to the next guy and making millions,
like playing hot potato with a time bomb.
Not surprisingly, the home owners default on their mortgage,
which at this moment is owned by the banker.
This means he forecloses and one of his monthly payments turns into a house.
No big deal: he puts it up for sale.
But more and more of his monthly payments turn into houses.
Now there are so many houses for sale on the market,
creating more supply than there is demand,
and housing prices aren't rising any more,
in fact they plumb.
This creates an interesting problem for home owners still paying their mortgages.
As all the houses and their neighborhood go up for sale, the value of their house goes down,
and they start to wonder why they're paying back their $300,000 mortgage
when the house is now worth only $90,000.
They decide that it doesn't make sense to continue paying, even though they can afford to,
and they walk away from their house.
Default rates sweep the country and prices plumb.
Now the investment banker is basically holding a box full of worthless houses.
He calls up his buddy, the investor, to sell his CDO, but the investor isn't stupid
and says: "No, thanks". He knows that the stream of money isn't even a dribble anymore.
The banker tries to sell to everyone, but nobody wants to buy his bomb.
He is freaking out because he barreled millions, sometimes billions of dollars
to buy this bomb and he can't pay it back.
Whatever he tries, he can't get rid of it.
But he's not the only one: the investors have already bought thousands of these bombs.
The lender calls up trying to sell his mortgage, but the banker won't buy it
and the broker his out of work. The whole financial system is frozen,
and things get dark.
Everybody starts going bankrupt.
But that's not all:
the investor calls up the home owner and tells him that his investments are worthless,
and you can begin to see how the crisis flows in a cycle.
Welcome to the crisis of credit!