Over the jump.
Okay, I guess this doesn't count as a diary really, so much as a question. But this place seems to house a lot more of the intellectuals than any other place online.
I think I finally got my head around all this, and I was wondering if the below explanation is pretty much what happened. And if so, then this isnt as bad as we thought.
From what I understand...
Think of a mortgage security like a car insurance policy held by a company. Basically, securities are like selling car insurance on the car to other people.
The person who owns the car paying the insurance premium every month is the equivalent of the home owner making the mortgage payment every month.
And the person crashing the car and thus collecting a claim is the equivalent of the home owner declaring bankrupcy.
The shady part is, instead of selling the insurance policy on that car just once, they sold it to 8 different people.
Where are there's 9 trillion dollars worth of home mortgages out there, there's 60 trillion dollars worth of insurance policies on those same homes.
Is that correct, is that essentially what is going on?
If so, then that gives me cause for hope. only about 10% of home owners are actually going to be unable to pay their mortagage and thus will be forced to default on the home. So of that 9 trillion dollars, only about 900 billion dollars worth of homes are going to declare bankrupcy.
Declaring bankrupcy is the equivalent of crashing the car. And we prevent them from declaring bankrupcy, then the insurance policies continue to get paid, and everyone is happy.
We still have 700 billion dollars set aside for this bailout that we're not sure how best to spend, and 900 billions in home mortgages that will default.
If this is true, can't the govt just buy up the mortages instead as they are about to go bankrupt and let people stay in their homes, ask them to pay whatever they can to stay in their homes. Even if the govt loses all of the 900 billon just in the payments, still seems worth it to avert the crisis.
Is this explanation way off base or is this basically what's going on. I'm not really sure.
Thank you for any help.