An article from the BBC profiling Stockton, California does an excellent job of showing just how crazy the mortgage market got:
Steve Carrigan is in charge of economic development for Stockton. He says bank loans made it a party every day.
“People went to the bank and got a loan on the increase in the price of their home. They went out and spent all that money,” he explains.
“Price of the home went up again, they went back to the bank and got another loan. They went out again and spent that money on cars and jewellery and furniture – whatever they wanted.”
With the help of the banks, Mr Carrigan says, people in Stockton “spent their house”.
…and an excellent job explaining what is happening to banks now that the price of homes is dropping (and why they’re suddenly worried about how much it costs to provide hand soap in the break room):
Banks had got round regulators’ rules by selling off their risky loans, but because so many of the securitised loans were bought by other banks, the losses were still inside the banking system.
Loans held in SIVs were technically off banks’ balance sheets, but when the value of the loans inside SIVs started to collapse, the banks which set them up found that they were still responsible for them.
So losses from investments which might have appeared outside the scope of the regulators’ 10:1 rule, suddenly started turning up on bank balance sheets.
No-one knows how big the losses from investments based on American mortgages will eventually prove to be – estimates now range from $200bn upwards.