The sub-prime loans were interest only for 5 years then would revert to a regular loan, borrowers though that they could sell and take their equity and then buy a home they could afford. The problem was that the housing market slowed down and your sub-prime loan was a negative amortization, meaning that every time you made a payment you owed more than you did. With a slow real estate market housing costs declined so you are now living in a house that is worth less than what you owe on it and at the same time your sub-prime loan is making the transition to a normal loan and your payment increased.

When people started losing homes to foreclosure, the lending institutions were taking back property that even they could not sell for what was owed on it. Each home they took back caused them to lose money.

Most impacted by this was Fannie Mae and Freddie Mac because they bought these loans for other loan institutions.

We now have a snowball effect as a result. It started with home prices skyrocketing (where I live homes that cost $450,000 went to $750,000 in a year and a half), once these costs get beyond the ability of the average person can afford the prices stall and then start to fall.

I’m not so sure that we have our finger in a dike, it seems to be more like trying to bail water on the Titanic and we all know what happened to the Titanic.

Now we could be headed for a depression, this could be hastened if everyone starts making a run on the banks to get their money before it is all gone. That might be a good thing if it would get housing prices back to the $15,000 they were at when I bought mine and it didn’t last so long that people didn’t starve to death