Subprime Primer

WSJ (via The Big Picture) has a great graphic that simply explains the how mortgages are financed. By understanding it, you can then understand the subprime meltdown (click to enlarge):

With the subprime portion of the market, the borrowers are high risk and that risk is simply pushed right up to the investors. Everyone else along the way makes fees, investors get higher than normal returns with reassurances from "rating agencies" that the bonds are "relatively safe" and all is hunky dunky.

Until.

Lenders default. When the money stops coming in, the fallout goes right up the ladder: borrowers lose their home, lenders go out of business, brokers go out of business, investment banks eat losses and the investors hold junk pieces of paper. When those investors, usually the "big boys", start screaming all hell breaks loose. So before those folks get mad, or Congress starts to investigate, the old-school connections kick in to stop the bleeding. That is, until the bleeding comes from an artery that's too big for even them to stop. Then we turn to unkie Bernanke to print more dollars and/or taxpayers get sent a bill.

Just a note. One of the key loans of the subprime market is the adjustable rate mortgage. I've read elsewhere, and seen charts, that of the loans made during the bubble, we're still right at the beginning of those adjustment periods. And when all this was starting, unkie Al Greenspan said, "don't worry, be happy"!