89% was fixed rate mortages

fixed rate has a short time period and the rate changes every 6 months.

interest rate going up

ARM uses different index

SOFR - the secured overnight financing rate is a measure of what it costs the banks to lend to one another. today, ARM interest rates are indexed to the SOFR.

2/1/5 :

intro rate = 4.5

2 = can't go more than two points above

5 = life time cap = 5 points is highest you can go

1 = during your first adjustment and up to 1% with every periodic adjustment after that

ARM advantages

intro period ; the rate always starts low

good for short term; you might not even reach the adjustable period

adjusts downward ; allows you to avoid refinancing

when someone is unable to meet the legal obligation of debt repayment - can't pay for their mortgage : Default

could be described as 1930 financial melt down

bank sells mortgage to third party (typically)

it was hard to get a mortgage if you had bad credit or didn't have a steady job

investors bought mortgage back securities ( process of looking for illiquid asset and transforming it into a security.

^^ buy 1000s of individual mortgages (mutual fund) and grouped them up and sold them in small

("were safe investments")

because they needed more mortgages they started to give mortgages to in low income people. ( could become a poor investment, and become default )

started using predatory lending practices

could afford at first but then raised in price

prices of homes were going up after bought, puts person in good place ( illiquid asset ) and only owe what originally borrowed

the new lax lending requirements and low interest rates drove housing prices higher, which only made the mortgage backed securities and CDOS seem like an even better investment.

people couldn't keep up with their ballooning houses and everyone was becoming default

a bunch of expensive houses on the market, demand is lower

loosing A lot of money

insurance policies couldn't back up people