Moe's Money by


The Housing Bubble aka the Greater Fool Theory
Why did the housing bubble pop?  Same reason the tech bubble popped in 2001. And the stock market imploded in 1987.  We simply ran out of fools.  Ok, fools with money and/or good credit.  In a nutshell, mortgage companies have been writing mortgage contracts as fast as they could for the last several years, with, apparently, sometimes little regard for the quality of the mortgages, ie, can the person applying for the mortgage realistically afford to pay it.  The mortgage companies were the first level fools. But the fool line went continued. These mortgages were then repackaged (combined with other mortgages) and sold as assets on the stock exchanges. Not to geek out but every mortgage has 2 kinds of risk: default risk and prepayment risk. Default risk is the probablility that the owner of the mortgage (homeowner) will not be able to pay it. If they default and you hold that mortgage as an asset, you, well, lose. Prepayment risk is the probability that the owner of the mortgage will prepay it early, thuse


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