Money Rehab with Nicole Lapin - Encore: #TBT - WTF Was the 2008 Financial Crisis

Episode Date: July 3, 2022

Originally aired Dec 7, 2021. On Money Rehab, Nicole does unpack the headlines that are in the current news cycle, no doubt about it. But today she’s throwing it back to a hot-button topic from our past. It is true that the only way to protect yourself from repeating history is to understand it, so that you can make different choices in the future. The subprime housing crisis is one that’s worth understanding—especially in today’s climate with questions swirling around crypto being a bubble.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today, we're going to do something a little different.

In this episode, I'm going to be throwing it back to 2008 to talk about the subprime mortgage crisis. One of the goals on the show is to break down the headlines. And yes, I do unpack headlines that are in the current news cycle. But I also think it's important to dissect the hot button topics from our past, especially when those hot button topics are historical moments that financially crushed innocent people like you and me. It is true that the only way to protect yourself from repeating history is to understand it so that you can make different choices in the future. The housing crisis is one that's worth understanding, especially in today's climate with questions

swirling around crypto being a bubble. Depending on how old you are or where you grew up, you may have a really different understanding of the subprime mortgage crisis. you may have a really different understanding of the subprime mortgage crisis. Some people who experienced financial losses during that time have irreversible distrust of big banks and or the government's ability to provide for the health of the economy. If you weren't affected by the crash, you might not understand why some people are so wary of the financial system all these years later. Sure, you can understand why someone would be scarred after losing money intellectually. But to distrust the whole government and banking system?

Why? The answer is rooted in how the banks caused the subprime mortgage crisis and got away mostly unscathed. Real estate was all fun and games until the 2008 crash. There's a long history of the U.S. government really encouraging home ownership, and out of that came some investment vehicles like mortgage-backed securities. So WTF is a mortgage-backed security? Well, banks were essentially smushing mortgages that they owned together and baking them into one big mortgage pie. Then they would sell investors slices of

that pie and give investors pieces of the interest that the banks were making on these mortgages. Throughout the years, investors had gotten more and more excited about mortgage-backed securities because they were told that they were safe investments with a steady rate of return. So banks did what anyone does when they have a popular product. They made more. Before this time, banks were really careful and selective when giving out mortgages because if they gave a mortgage to someone who wasn't able to pay back the loan, also known as defaulting, the bank would potentially lose money. But when mortgage-backed

securities proved to be a profitable offering for banks, banks wanted to find more ways to generate more mortgages. So lenders started issuing subprime mortgages, which were loans given to people that would have typically been rejected for a mortgage, maybe because they had low credit or maybe just because flat out they couldn't afford a house. Sometimes these subprime mortgages were brought on by the borrower. Other times, lenders pushed people into mortgage offerings they couldn't afford. For example, some lenders would offer adjustable rate mortgages at really, really low rates to lure people in. You may be thinking, didn't these lenders think that some of these subprime mortgages were a recipe for disaster? Didn't they assume that at least some of these people would default on their mortgages and investors would lose money for mortgage-backed securities? Actually, some lenders felt that

mortgage-backed securities were pretty foolproof. The financial world assumed that even if someone defaulted on their mortgage, the lender could repossess the house and then sell it to another prospective homebuyer. Many people considered this home repossession option like an insurance policy for mortgage-backed securities. Therefore, mortgage-backed securities earned a triple-A investment rating, the rating given to the safest investments. The encouragement and ease of home ownership led more people to buy houses. And as we know, because of the rules of supply and demand, when there's more demand for something, the price tends to rise. And boy, oh boy, did housing prices rise. At the time, some people thought this was proof that real estate and mortgage-backed securities were a good investment.

In reality, the housing market was a bubble. In finance, a bubble is a scenario in which a particular investment is overvalued, meaning the price is going up because of popularity or supply and demand or speculation. Factors other than the investment actually generating more intrinsic value. And like any bubble, financial bubbles pop. And when they do, it's disastrous for investors. The bubble indeed burst when the people who had subprime mortgages started defaulting on their loans.

people who had subprime mortgages started defaulting on their loans. So the lenders stuck with the game plan and repossessed these houses and then put them back on the market. However, because so many houses were going back on the market, the prices went down. As you remember, being able to resell these houses was the investor's safety net. So when that safety net dissolved, the whole housing market crumbled. Yes, of course, the government has institutions in place to protect consumers, Federal Trade Commission, or FTC, and investors, Securities and Exchange Commission, or SEC. But these institutions did not diligently oversee big banks and other lenders during this time. Once the housing bubble did pop, the economy went into a tailspin. For many Americans that suffered during the collapse in the years that followed, the whole mess felt

extremely preventable. And yet they suffered at the hand of an inattentive government that left an extremely fragile and consequential system unchecked. What made people's frustration and anger worse was that the government passed the Troubled Assets Relief Program, or TARP, most commonly known as the bank bailout. This legislation gave out $700 billion in loans to prop up banks from utter collapse. It is indisputable that the crashing U.S. economy would have been even further devastated if huge financial institutions went under. But try telling that to a family who lost everything at the hands of an irresponsible bank and is now watching that bank get financial aid from the government. It's a hard pill to swallow for sure. There were so

many people who got screwed over by the 2008 crisis. Families who were encouraged to take out mortgages that they couldn't afford lost their homes. When these families stopped paying their mortgages, investors lost money in their mortgage-backed security investments. It was a really, really terrible time. In fact, this whole mess was actually what motivated me to become a financial journalist and financial expert. I wanted to help the people that big banks and maybe even the government weren't looking

out for. And most importantly, I wanted to help people protect themselves from anything like this ever happening again. It's important to remember that there are three types of bankers involved in the 2008 crisis. There were bankers who thought the housing bubble wasn't a bubble at all, that mortgage-backed securities actually were one of the safest investments you could make. These bankers did have contingency plans for their investors. Those contingency plans didn't pan out because they were predicated on the belief that there

wasn't a housing bubble. But these people were genuine in their belief that they were acting in their clients' best interests. There were also bankers who simply looked the other way, who decided that the money was just too good to address the creeping suspicion that things were about to go terribly wrong. Then, yes, there was that third group of bankers that knew they were playing with matches, but didn't hesitate to pour gasoline because they didn't believe they would be the ones to catch fire. For today's tip, you can take straight to the bank. You shouldn't hold yourself responsible for catching complex issues in the U.S. financial system. That's the job of the government. And since 2008, there has been more regulation to protect consumers. But one thing you

can do to protect yourself is keep your guard up when you think an industry is overvalued. Crypto, for example, is a potential bubble in the making, and that has less government safeguards in place than the housing market. My recommendation? Don't put more than 1% of your net worth in an industry that's a potential bubble, because all bubbles eventually burst. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy.

Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.