Query by Ashley C: Explain the Securitization Meals Chain?
Soon after watching the film, Inside Job, I learned that the Securitiziation meals chain led to the 2008 economic collapse. I never really understand it though. I know that a particular person wants a loan, banks had been giving out higher interest loans to individuals who could not afford them, but then i am confused. Who do the banks sell the loan to??
Best answer:
Answer by Atlas
I’m not an financial expert, so I hope this answer aids. The banks (lenders) sell the loan to an “Investment Bank”. The investment banks combine other debt (house loans, auto loans, credit card debt, and so on.) into complicated derivatives identified as Collateralized Debt Obligation or CDOs and sells that to investors.
The way it use to work, you (the purchaser) would spend back the loan to a lender over a period of a few decades. Now, the payments on the loan go straight to the investors of the world.
The high interest loans you speak of are known as “sub prime loans”. A lot of individuals were place into sub prime loans strictly since the interest price was higher, even although the borrower could not afford the loan. The worth of houses from 1996 to 2006 went up 194%. In that period of time, sub prime lending went from $ 30 billion to $ 600 billion.
In my opinion, “deregulation” was the widespread denominator in what led up to the 2008 financial collapse.
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