Financial Shock by Mark Zandi - By: Richard A Stooker

When you read that subtitle, you may be misled into thinking that the subprime mortgage crisis was over. That's the major weakness of this book. It was written prematurely. It stops in the summer of 2008, before the collapse of other investment banks on Wall Street and the stock market sinking through March 2009.

Plus, he writes about Fannie Mae and Freddie Mac as though these two organizations taking over mortgages is a good thing. He had no apparent clue that they would soon need a federal government rescue themselves.

Other than that, it's a good, broad view of the crisis from many angles. Subprime mortgages and how the mortgage market of the bubble period was different. The securitization of mortgages. Global investors, including hedge funds. Mortgage brokers. Real estate lenders. Politicians pressuring And ordinary people who took advantage of the system to move into houses they should have known they couldn't afford.

Early in 2007 I was commissioned to write an online article about the standards that home buyers had to meet to qualify for mortgages. I found a lot of information about the traditional ratios and qualifications.

Then I found an article that told the truth. Basically, it said, all the old standards had been thrown out the window. The entire mortgage industry was operating on a nudge nudge, wink wink basis. Just say you can have enough income to make the payments, and you're approved.

I also saw some of the situation at my day job, where I interviewed lots of welfare recipients. Some of them were women who told me they were buying their house. But they had no income of their own. They were living on their children's Supplemental Security Income (SSI) checks.

Yet mortgage lenders were approving them for home loans.

I was appalled. I've bought two houses, and went through lots of paperwork to get those loans approved. How could banks be so crazy as to lend all that money to everybody? Including people on welfare?

This book goes into great detail about how, in an age of low interest rates on safe investments, investors around the world went after higher yields -- consistently underestimating the risk.

Yet in a way you can't blame them. Historically, the vast majority of American home buyers pay their mortgages. The percentage of defaults is well-known.

But historically home buyers were required to prove their ability to pay their mortgages.

And the market prices of houses had never gone down on a national basis. Local, yes. National, no.

And, as the author points out, nobody ever thought about the risk that subprime house buyers would start defaulting on their mortgages all across the United States. Or what would happen if all those mortgage-backed securities held by financial institutions around the world all went down in market price at the same time.

He ends the book by making interesting suggestions on how to avoid future problems. Of course, neither President Bush nor President Obama read the book!

About the Author

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