OK, from what I’ve seen on TV, heard on the radio, and have read on the Dope, to quote from a favorite TV show of mine, I have a “crude grasp of the general idea.” But I still have a bunch of questions about all of this.
This thread will probably be a little long because I am extremely ignorant of how most of this works, and I hope knowledgeable people will have the patience to answer these questions.
Oh, and I guess I should say I’m asking about practices here in America.
OK, so I understand that all or most of the companies that people got their mortgages from then sold those mortgages to other institutions such as banks. I also have heard that the mortgages got bundled and resold. I understand that banks (and other institutions) bundled mortgages and sold them to each other. Did the mortgage companies also bundle their mortgages and sell them to the banks, or does the bundling start at the banks?
Let’s say someone gets a $500,000 mortgage. Typically, what would that mortgage be sold for?
Say a $500,000, a $350,000, and a $400,000 mortgage are bundled up and sold. Typically, what would the bundle be worth?
I understand that if people were buying houses they could afford, everything would be fine, but that isn’t always the case, which leads me to some questions.
Say a bank has a $500,000 mortgage, or has that mortgage as part of a bundle. Say the owner defaults on the loan, and the house is foreclosed upon. What does that do to the mortgage’s worth? If the bank resells the house, does it have anything to do with the original mortgage, or would that result in a brand new mortgage? If so, is the $500,000 mortgage only worth what was paid on it, since there will be no more future payments?
Final question. Somehow, this is connected to the “credit crunch” in that it’s affecting the ability of banks to lend to the public, and each other. I think I’ve also heard that it’s affecting bonds too. What is the connection? Have banks been sinking most of their money into bad mortgage bundles, and now that they can’t make money from them, they don’t have much money to spend?
Anyway, I know that this is all complicated, but from other things I’ve seen, heard, and read, I think that if these questions will be answered from me, it would fill in a huge gap in my knowledge and understanding. Thank you.