What are the reasons or causes for the current financial crisis (mortgages, stock market, etc.)?

I have had this question asked to me during a number of interviews. What has caused the current financial crisis? I know the overall summary of what is going on but I dont know what exactly are the causes and effects. I need a good answer so please help me out with this.What are the reasons or causes for the current financial crisis (mortgages, stock market, etc.)?
Lending firms started coming out with more exotic loan types to allow people that normally would not be able to afford a monthly payment on a house the opportunity to purchase a home (i.e. interest only loans, zero-down . But as with any business the whole goal is to make money. The old salesman trick is to just get your foot in the door. This is equivalent to the ';free 30-day in-home trial';. If you can just get someone to commit, at any level, you're far more likely to make the sale. So banks spiced up these new loans with special deals. The most caustic was a low introductory monthly payment. Since the loans allowed people previously unfamiliar with purchasing a home the opportunity to buy, many predatory lenders would take advantage of their clients lack of knowledge (although I do believe the barrowers bare some responsibiliy for not knowing exactly what they signed up for) and simply say ';here's your monthly payment';, knowing full well that it would go up in a month, or 3 months, or a year, or etc., to a price that was much higher than the introductory monthly payment. Hedge funds wanted a piece of the action, so they would often buy the rights to these loans without fully accounting for the risk of default. When the housing bubble (which was caused by unnecessarily low interest rates during the Alan Greenspan era of the Federal Reserve which allowed real estate investors a great buying opportunity, at least at the start) collapsed, many people who had become real estate investors due to ';how easy it was to make money in the real estate market'; ended up straddling several of these exotic mortgage payments. They thought it wouldn't be a problem to have a loan with a low 1 year teaser rate because they could sell the property in a few months at a much higher price than they paid for it. When the bubble burst, there were no longer any buyers. After their intro rate ended, the payment sky rocketed to an unaffordable price, and many times the property became worth less than was paid for it, making selling it a sure loss of money. So defaulting on the loan was the only option for these investors. With all of the defaults, banks and hedge funds were left holding the bag. No one came out a winner, banks lost money, people lost their homes, hedge fund managers lost their jobs and got a permanent red mark on their resumes.





One comment on these real estate investors: there is an old saying on Wall Street that when the shoe shine boy starts giving you stock tips, you know it's time to get out. That simply means that when the stock market starts to look like this easy money making machine, so easy in fact that anyone can do it, the market has gone up for far to long and is overdue for a correction. About a month before the real estate bubble burst, my next door neighbor, who only a year ago was a first time home buyer, had bought a rental to sell for a profit at a later time. They've had one renter who's never paid up, and that's it. They've lost a lot of money on the deal. I remember starting to wonder if the bubble would be over soon when I heard they'd bought that rental.





Hope this helps!What are the reasons or causes for the current financial crisis (mortgages, stock market, etc.)?
Really ... a good answer is not possible from this Y/A member here now ...!!


1) Risk factor was not considered by Banks and Mortgage Bankers


2) Greedy bankers allowed huge and high-cost loan to those (sub-prime)who should not have get it - huge credit card defaults


3) Vicious circle was formed - defaults in mortgage payments - rate hiked - again default


4) Economy was in distress for 'war funding' - employments lost - expenses was not curbed - again defaults


5) Foreclosed properties had no buyers


6) Huge amounts of defaults written off by Banks resulting in panic


7) Fed Reserves rate cuts had no effect - entire globe affected -


8) There is a vacuum in leadership - nobody is in command


....ertc...etc.
One word, FEAR.





Also, it resulted from lending to people who couldn't pay their bills and with an inadequate risk premium, it made no sense to me.