1 - if the Fed has cut interest rates, would not that rate cut trickle down to the mortgage
A: US interest rates r determined by the US Bond market.
Many banks r charging a premium because they r concerned about default risk.
Look at 10 year Treasury prices (benchmark for most consumer rates).
Compare that to the LIBOR rate (many mortgages tied to LIBOR).
LIBOR = London Interbank Offer Rate. Complicated. Basically it is an agreement with all U.S. charter banks under UK law.
2 - Were people informed of the ''ballooning'' that was going to happen?
Yes, I have been saying this since summer 2005. Most people, & lenders were not paying attention.
3 - Why did lending institutions issue mortgages at adjustable rates knowing that they were going to increase out of peoples budgets?
Greed. Easy money. Lenders resold loans to Wall Street & to banks & governments world wide to reduce their loan risk.
How did we get in this mess?
1. Former HUD director, Henry Cisneros under the previous administration strongly advocated that we should have home loans to more people, including people who could not afford them by current standards.
2. The FED kept rates at historical lows which made this job easy.
3. Real estate prices soared with these low rates & money that moved out of the stock market in 2000-2002.
4. By 2004, the FED began raising rates due to their nutty idea on inflation fears. Their inflation ideas was & is wrong. The FED mistakenly saw inflation but failed to attribute the cause was driven by higher commodity prices (oil, corn, wheat, steel, milk, etc). The big drive in oil prices was & is due to demand for oil by China & India is explosive growth. These FED rate hikes continued until 2006.
5. The FED Funds rates went from 1.00% to 5.25% in two years - a 425% increase in rates. This killed the subprime market & hit everyone with an adjustable rate mortgage, no money down mortgage, & interest only mortgage.
6. Greedy banks & other lenders were lax on their credit standards & gave out loans to anyone without any qualifications. This was a mistake.
7. The higher rates triggered loans to go into default as many people could no longer afford their house payment. They should not have got the loan in the first place.
8. Some alleged ''predatory lending'' may be a slight factor. It is ridicules to think that someone could buy a $500k home who makes $18k a year, & never expect rates to rise & never expect home prices to fall.
9. Creditors made their own problem worse by tightening credit standard in spring/summer 2007. The tighter standards increased defaults. As defaults increase the problem perpetuates on itself. Mortgage insurers r partially stuck with huge losses as they guaranteed payment on these higher risk loans. These companies r 1 step from bankruptcy right now (ABK, MBI, PMI,. MTG, RDN).
10. Banks & other lenders began taking huge losses as they write off part of their bad loans. This problem is huge. Banks & lenders will not admit how bad their portfolio really is. The result is the wave of selling in the stock market.
Future issue?
Bad credit card portfolios. if people can not pay their mortgage, what makes anyone think they can pay their credit card?
Proof Note: Amer Express (AXP), Capital One (COF) reported large Q4 (2007) losses due to credit card defaults. Were just getting started with this issue.