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What was done to prevent a housing collapse? I am under the impression the government focused on preventing a banking institution collapse, which is different.

What was done to prevent a housing collapse? I am under the impression the government focused on preventing a banking institution collapse, which is different. That money was given to offset the liabilities caused by the housing collapse. If Bob was foreclosed, he was foreclosed because he didn't make his payments, at which point his house was put on the market. The banks collapsing wouldn't put more houses on the market than before, it would just mean that a different financial holding company would be selling the houses. So to prevent a housing collapse the government would have to make it easier for Bob to make his payments, but as far as I know the government didn't do that. Or perhaps you are talking about something other than the bailout like interest rates, in which case I would still be curious what you think would have caused the collapse

derefr 9y ago
My understanding: the government themselves bought a large portion of the housing CDOs (i.e. people's mortgages) from the banks during the credit freeze, to both give the banks money, and give the CDOs a value to get them trading again. If the government had not done that, and had instead just given the banks money, the banks would have had the breathing room to sell their CDOs off for pennies on the dollar, devaluing the mortgages and thus the properties themselves.
- opportune 9y ago
  I think I get it. For some reason I thought CDOs were kind of like bonds or annuities based on the mortgage payments, but I didn't realize that if you bought a CDO from someone you were also buying the underlying assets. So in the first scenario I thought banks were on the hook for reimbursing mortgage payments to the CDO holders, but in actuality whoever held the CDO was the one getting screwed. However, even if banks were forced to sell off their CDOs, I don't quite see how that devalues the properties. Selling a CDO for a lower rate than before might simply suggest a reduced rate of people making their mortgage payments. For example if I have given Bob a mortgage on a house worth $100, expect to make $10 from interest, and think Bob has a 10% chance of defaulting, wouldn't the value of the CDO be roughly $109 (ignoring that the amount of time into the mortgage at which he defaults affects the price), because even if Bob does default, I still own the $100 house? And then let's say I run into liquidity trouble and need to sell this CDO for $101 (over $100 because my own liquidity problems don't necessarily affect Bob's), that doesn't seem to affect the value of Bob's mortgage at all. Was the problem that the only institutions that could actually buy CDOs were banks themselves? So then if they were all illiquid, there was nobody who could even buy that many assets at once.
  - sokoloff 9y ago
    If trillions of CDOs were to hit the market all at once because of a concentration of defaults, Bob's house isn't likely to be worth $100 anymore. Depending on how much the CDO Jenga tower inflated the value, it might not even be readily sellable at $50. Why? Because it will be competing for buyers with Charlie's, Dave's, Eve's, Frank's, George's, Henrietta's, Irma's, Julie's, etc houses that are all also for sale after their defaults and those remaining standing with cash or liquid credit will be able to be choosy and drive a hard bargain especially if they're not going to personally occupy the property (as then they are largely indifferent among the competing housing stock).
- pjc50 9y ago
  I don't believe that the arrow of causation runs that way; how does selling the CDO at any price push the house price around?
  - pixl97 9y ago
    >how does selling the CDO at any price push the house price around? Because the CDO's value is a representation of the value of the underlying security, at least in theory. From other sources online >A Collateralized Debt Obligation (CDO) is a security whose value is collaterized (i.e. 'backed') by a pool of underlying fixed-income assets. It is an investment that yields a regular return, its payments being derived from the performance of this pool. It is a financial instrument that traders use to sell securities that individually would be hard to sell (such as payments from a subprime mortgage). As part of a large diverse pool such securities would represent just a fraction of the total value of the underlying assets making it as a whole attractive to investors. If the value of the CDO goes up it may represent that the ability for the underlying debt to be paid is more likely. If all debts are being paid it may represent that the initial value the asset was sold at was too low. E.g. the seller is not optimizing their ability to profit. Similarly large firms can signal weakness in the market by selling of the CDO for a lower price, divesting themselves of the future risk. Markets are not bottom up or top down. Every actors behavior in the market can signal behavior changes in other levels of the market.

derefr 9y ago

My understanding: the government themselves bought a large portion of the housing CDOs (i.e. people's mortgages) from the banks during the credit freeze, to both give the banks money, and give the CDOs a value to get them trading again. If the government had not done that, and had instead just given the banks money, the banks would have had the breathing room to sell their CDOs off for pennies on the dollar, devaluing the mortgages and thus the properties themselves.

opportune 9y ago
I think I get it. For some reason I thought CDOs were kind of like bonds or annuities based on the mortgage payments, but I didn't realize that if you bought a CDO from someone you were also buying the underlying assets. So in the first scenario I thought banks were on the hook for reimbursing mortgage payments to the CDO holders, but in actuality whoever held the CDO was the one getting screwed. However, even if banks were forced to sell off their CDOs, I don't quite see how that devalues the properties. Selling a CDO for a lower rate than before might simply suggest a reduced rate of people making their mortgage payments. For example if I have given Bob a mortgage on a house worth $100, expect to make $10 from interest, and think Bob has a 10% chance of defaulting, wouldn't the value of the CDO be roughly $109 (ignoring that the amount of time into the mortgage at which he defaults affects the price), because even if Bob does default, I still own the $100 house? And then let's say I run into liquidity trouble and need to sell this CDO for $101 (over $100 because my own liquidity problems don't necessarily affect Bob's), that doesn't seem to affect the value of Bob's mortgage at all. Was the problem that the only institutions that could actually buy CDOs were banks themselves? So then if they were all illiquid, there was nobody who could even buy that many assets at once.
- sokoloff 9y ago
  If trillions of CDOs were to hit the market all at once because of a concentration of defaults, Bob's house isn't likely to be worth $100 anymore. Depending on how much the CDO Jenga tower inflated the value, it might not even be readily sellable at $50. Why? Because it will be competing for buyers with Charlie's, Dave's, Eve's, Frank's, George's, Henrietta's, Irma's, Julie's, etc houses that are all also for sale after their defaults and those remaining standing with cash or liquid credit will be able to be choosy and drive a hard bargain especially if they're not going to personally occupy the property (as then they are largely indifferent among the competing housing stock).
pjc50 9y ago
I don't believe that the arrow of causation runs that way; how does selling the CDO at any price push the house price around?
- pixl97 9y ago
  >how does selling the CDO at any price push the house price around? Because the CDO's value is a representation of the value of the underlying security, at least in theory. From other sources online >A Collateralized Debt Obligation (CDO) is a security whose value is collaterized (i.e. 'backed') by a pool of underlying fixed-income assets. It is an investment that yields a regular return, its payments being derived from the performance of this pool. It is a financial instrument that traders use to sell securities that individually would be hard to sell (such as payments from a subprime mortgage). As part of a large diverse pool such securities would represent just a fraction of the total value of the underlying assets making it as a whole attractive to investors. If the value of the CDO goes up it may represent that the ability for the underlying debt to be paid is more likely. If all debts are being paid it may represent that the initial value the asset was sold at was too low. E.g. the seller is not optimizing their ability to profit. Similarly large firms can signal weakness in the market by selling of the CDO for a lower price, divesting themselves of the future risk. Markets are not bottom up or top down. Every actors behavior in the market can signal behavior changes in other levels of the market.