Dr. Pantuosco

From 2001-2007, home values rose by 50 percent

Since housing prices were constantly increasing, banks began to loan money for houses to people who could not pay it back.

In order to receive more money to make loans, the banks would then package the home loans and sell them to investors.

This would provide them with money so that they could make more risky loans.

Since so many people were buying houses for high prices, construction companies built as many houses as they could.

Each house they sold was extremely profitable.

With all their money going to housing, people stopped accumulating savings in the bank.

Also, the price of goods was increasing due to inflation.

When housing price began to fall, the whole system began to unravel.

Many people owed more money for their house than the house was worth

Ex. House is worth $100,000 Family owes $140,000 on the house

The family leaves the house and lets the bank

have it because they cannot pay the difference

The investor who bought the bundled loan from the bank is the one who is stuck with the loss.

They now own the houses that are worth less than they originally paid for the investment.

Ex. The investor paid $1,000,000 for the loans.

They now own the houses associated with the loans that are only worth $800,000.

The problem arose from greed. People wanted houses they couldn’t

afford. Banks wanted to make more money

without considering risk.