Few would have thought 12 months ago that granting mortgages to a few borrowers who couldn’t afford the repayments, would lead to such world wide turmoil. But it was more than just a few borrowers. It was a few million.
The mortgage providers bundled the mortgages together and transferred them to other lenders. They were then repackaged, given an attractive credit rating, then on sold to investors and super funds all round the world. The investors thought they were buying a highly rated bond with an interest rate better than bank deposits, when in fact they were buying a collection of mortgages to borrowers with a high possibility of default.
Default is what occurred. With a large level of defaults, a lot of houses hit the market at once. House prices plummeted. Invertors’ bonds became worthless. The only recourse for investors was to sue those who sold the toxic product. But firms like Lehman Brothers declared themselves bankrupt. In Victoria alone it is estimated that local governments and other semi government bodies have lost $30m in this way.
We are now witnessing the same phenomena in our MIS industry.