However, the holder of a CDO or MBS would be unable to take these homeowners to court. And even if he succeeded, homeowners could simply return their house keys, as they, too, enjoy the protection of non recourse.

The housing recession the worst in US history and worsening every day will eventually see house prices fall by more than 20 , with millions of Americans losing their homes.

While a big US rating agency gave European companies, on average, only a triple B rating in recent years, CDOs based on MBSs easily obtained triple A ratings. According to the IMF, 80 of CDOs were in this category.

The Right Weights for Mortgage Risks

Occupy the Mortgage Lenders

So far, the sub prime crisis has had a limited direct impact on Latin America s mortgage markets.

Losses are spreading from sub prime to near prime and prime mortgages, commercial mortgages, and unsecured consumer credit (credit cards, auto loans, student loans).

Mortgage debts, too, must be written down.

The entire sub prime market is largely a decade old innovation the word sub prime did not exist in any language before 1994 built on such things as option adjustable rate mortgages (option ARM s), new kinds of collateralized debt obligations, and structured investment vehicles.

After the subprime crisis erupted, mortgage and consumer debt was paid down by households either with their savings or by default.

Mortgages became more widely available.

Mortgage brokers were happy to get in on the act.

It was called securitized mortgages.

Unlike virtually every other country, US residential mortgages are effectively no recourse loans.

Indeed, the foreclosure rate is increasing.

The problem was not just sub prime mortgages.

Moreover, the US housing market appears to be stabilizing....Overall, the US mortgage market has remained resilient, although the sub prime segment has deteriorated a bit more rapidly than had been expected.

a rapid reduction of insolvent households debt burden, preceded by a temporary freeze on all foreclosures

Think of collateral debt obligations (CDOs) as poisoned sausages, says the economist Nouriel Roubini, with sub prime mortgages as the rat meat in them.

As a result, mortgage brokers maximize their income by generating larger volumes of mortgages, as do the banks that package these loans into mortgage backed securities (MBS s).

In Mexico, all mortgages carry fixed interest rates, unlike the infamous exploding ARMs that left US homeowners ruing their choice of adjustable rate mortgages when interest rates rose. Mexican mortgages are indexed to inflation, but the state mortgage agency links that index to the minimum wage and makes up the difference if mortgage interest adjustments for inflation outpace wage growth.

But mortgage markets remain underdeveloped in most emerging economies.

What is needed is a quick write down of the value of the mortgages.

In the fourth act, the real estate bubble will burst.

Its members could not agree even on how to define subprime mortgages and calculate how many such mortgages there were in the United States at the time of the crisis.

Even so, the explosion in the quantity of collateralized debt obligations and similar securities went far beyond what was needed to sustain mortgage lending.

Collateralized debt obligations (CDOs, mainly tied to mortgages) made a new population of aspiring homeowners supposedly creditworthy by enabling the originating banks to sell sub prime debt to other investors.

MUNICH Once upon a time, stocks were risky and collateralized securities were safe. That time is over, as the breakdown of the American mortgage securitization market has shown.

Delinquencies, defaults, and foreclosures are now spreading from sub prime to near prime and prime mortgages. Thus, total losses on mortgage related instruments include exotic credit derivatives such as collateralized debt obligations (CDOs) will add up to more than 400 billion.

What started with subprime mortgages spread to all collateralized debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi trillion dollar credit default swap market.

The state is an epicenter of the housing bust and the foreclosure crisis.

Around sixty sub prime lenders have already gone bankrupt.

Some limited previous experience with mortgage modifications is not encouraging.

Indeed, more triple A CDOs were created than there were underlying triple A assets.

Wall Street has polluted the economy with toxic mortgages.

Sub prime mortgages made the American dream come true.

One place to start is the tax deduction for interest payments on home mortgages.

The sub prime crisis has exposed serious problems that we must address.

And according to an NBER working paper by Efraim Benmelech and Jennifer Dlugosz, 70 of the CDOs received a triple A rating even though the MBSs from which they were constructed had just a B rating, on average, which would have made them unmarketable.

Reducing the face value of mortgages and providing the upside in case home prices were to rise in the long run to the creditor banks is another way to convert mortgage debt partly into shareholder equity.

To compensate for the disappearance of that market, and for the simultaneous disappearance of non securitized bank lending to American homeowners, 95 of US mortgages today are channeled through the state institutions Fannie Mae, Freddie Mac, and Ginnie Mae.

Many banks have already acknowledged their open ended losses in residential mortgages.

The terms of mortgages need to be adjusted to the homeowners ability to pay.

But, in America s home mortgage market, this is much less common.

In this way, the Fed contributed to creating the sub prime crisis.