The movie has gotten nods for Oscar nominations, with an all-star cast including Steve Carell, Brad Pitt, Christian Bale, Ryan Gosling, Marisa Tomei, and others. But far from just an entertaining movie, The Big Short is the best two hour layman’s summary of the unfathomable circumstances and happenings in the U.S. financial markets during the boom years, and the greed, oversight, and bad decisions that were so prevalent, they are far stranger than fiction.
Filled with simple explanations for terms like “Mortgage-Backed Securities,” “Credit Default Swaps,” and “Collateralized Debt Obligations,” the movie is a great primer on the financial crash and subsequent Great Recession in the U.S. – as well as a stern warning why history may repeat itself.
We could easily fill a book (or volumes of books!) - not a blog - on the mortgage meltdown and financial crash. You’ll learn all of the essential definitions, concepts, and events about the mortgage meltdown when you watch the movie, but today we’ll do offer something far better than popcorn to chew on while recline in your cinema seat:
Here are 15 statistics about the mortgage meltdown and financial crash that you should know before watching the movie, The Big Short.
1. Before it was called a Great Recession, banking collapse, or financial crash, many people referred to the economic event as a mortgage meltdown. In fact, the proportion of low-grade subprime mortgage originations climbed from a historical average of 8% to over 20% between 2004 and 2006. About 90% of those subprime mortgages had adjustable-rates.
2. Despite the increase in real estate values and a booming economy, Americans didn’t accumulate wealth or savings but took on more debt than ever before. Our ratio of debt to personal income rose from 77% in 1990 to 127% by the end of 2007, most of it due to huge mortgages.
3. How steep of a cliff did our economy fall off? By 2009, U.S. housing prices had dropped nearly 30% and the stock market had lost about 50% of its value compared to only two years earlier.
4. Between 2007 and 2009, The U.S. economy lost nearly 9 million jobs, about 6% of the entire workforce, and saw 40% of our gross domestic product disappear.
5. Emboldened by seemingly never-ending rising home prices, a flood of easy home equity and cash-out loans, and, let’s face it, greed, U.S. consumers treated their homes like “ATMs” for the first time. In fact, home equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005, a figure that equaled a shocking 11.5% of our entire GDP!
6. Between 1994 and 2004, the U.S. homeownership rate increased from 65.4% - the typical historical rate – to an all-time high of 69.2%.
7. U.S. home prices fell by over 20% between mid-2006 and September 2008. By 2012, they had fallen by almost 40%.
8. With decreasing real estate prices and over-burdened mortgage debt, more U.S. homeowners were underwater on their homes. In fact, by 2010, 23% of all U.S. homes were worth less than the mortgages on them.
9. Foreclosures soon reached epidemic proportions across the country, with 4 million completed foreclosures between 2008 and 2012. In September 2012, 3.3% of all homes with a mortgage were in some stage of foreclosure.
10. During the real estate boom, the average American homeowner had multiple properties at unprecedented levels as they looked to cash in on rising equity. In 2006, 22% of all homes purchased were for investments (rentals) and another 14% were second or vacation homes. That means at least 40% of all homes bought during that year (and there were far more bought as owner-occupied homes but never lived in) were not primary residences.
11. By 2009, more than 40% of all subprime adjustable rate mortgages were past due or in foreclosure.
12. In 1995, only 5% of all mortgage loans were of the subprime variety, totaling $35 billion. But by 2006, 20$ of all loans were subprime, adding up to $600 billion.
13. In addition to standard subprime loans, many “alternative-A” lending products allowed interest-only, no money down, no income verification, and even negative equity (option arm) loans. In the heart of the real estate and lending boom, the typical home buyer invested only a 2% down payment (compared to the standard 20%) and 43% of all buyers put no money down at all!
14. During this period, about 25% of all loans were interest-only, one-third were short term adjustable rate mortgages (ARMs) and one in ten new mortgages were option ARMs. A jaw-dropping 68% of option ARM loans originated by Countrywide Financial and Washington Mutual had low- or no-documentation requirements!
15. The rate of mortgage fraud grew by about twenty fold between 1996 and 2005 – and then DOUBLED between 2005 and 2009, causing an estimated $250 billion in losses during that period.
These are shocking statistics, but still just scratch the surface of the magnitude and impact of the financial crisis, more of which had to do with Wall Street than Main Street. We promise to post another blog soon with more facts and stats about the banking collapse, until then thought to be “Too big to fail.”