In 2007 2008, this was the case for a class of securities based on residential mortgages in the United States (RMBS, or residential mortgage backed securities).

Its banks and financial institutions were not tempted to buy the mortgage supported securities and credit default swaps that ruined several Western financial institutions.

It was called securitized mortgages.

The main problem with US mortgage based securities is that they are non recourse. A CDO is a claim against a chain of claims that ends at US homeowners.

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 hearings also led to passage of the Securities Act of 1933 and the Securities Exchange Act of 1934.

The stock market dropped sharply. Home prices fell 40 , completely wiping out the equity of one third of all homeowners with mortgages.

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.

It may make sense for central banks (or Fannie Mae, America s major government sponsored mortgage company) to buy mortgage backed securities in order to help provide market liquidity.

Of course, there is no glee in seeing stock prices tumble as a result of soaring mortgage defaults.

True, major commercial banks, like Citibank and Bank of America, tottered, but they were not at risk because of their securities underwriting for corporate clients or their securities trading divisions, but because of how they (mis)handled mortgage securities.

The Right Weights for Mortgage Risks

Occupy the Mortgage Lenders

Mortgage debts, too, must be written down.

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

From 2000 through 2007, millions of American homeowners entered into mortgage contracts to finance their homes. Securities based on those contracts ended up, in part, in the hands of financial institutions.

That way, they would share the pain if the securities are not serviced and thus gain a powerful incentive to maintain tight mortgage lending standards.

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

America managed to pass off bad mortgages worth hundreds of billions of dollars to investors (including banks) around the world.

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

So they've created deductions, subsidies and insurances.

When housing prices fell, so did the value of the mortgages and the securities based upon them.

Initially, there was little basis for re pricing them rationally, because the event (a peacetime decline in US house prices) was unprecedented.

Consider the following. The financial crisis erupted in 2008 when mortgage backed securities were revalued at much less than what they had been thought to be worth.

Declining house prices are key to the financial crisis and the outlook for the economy, because mortgage backed securities, and the derivatives based on them, are the primary assets that are weakening financial institutions.

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

Mortgages became more widely available.

Mortgage brokers were happy to get in on the act.

Credit card, electronic wallets, mortgage back security stock options.

The sub prime sector in the United States was hit, and the financial crisis spread from there.

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.

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

In the US, the Term Asset Backed Securities Loan Facility (TALF) program and the Public Private Investment Program (PPIP) were in effect debt forgiveness schemes aimed at sub prime mortgage holders, but on too small a scale.

But it is the economic slowdown that renders all developed countries less resistant to the financial shocks resulting from the sub prime problem and from the mixed loan packages that are then used to dilute the risks attached to sub prime debt.

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.

Around sixty sub prime lenders have already gone bankrupt.

And a stronger economy would help domestic banks by reducing potential bad debt and mortgage defaults.

Indeed, the foreclosure rate is increasing.

The problem was not just sub prime mortgages.

Debt relief created fewer problems for banks in the US because a significant proportion of the subprime loans packaged into AAA rated securities had been sold to gullible foreigners.

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).

India s banks and financial institutions were not tempted to buy mortgage backed securities and engage in the fancy derivatives trading that ruined several Western financial institutions.

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.

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

Housing prices began to rise by 10 a year.