When looking at what our children or chilren'd children will be studying in future business classes the subprime meltdown will surely be on the top of the list.  Think about the impact that this seemingly trivial error had on the entire economy.  Homeowners were extended credit that they could not repay if interest rates rose ... that is the trivial part to many mortgage brokers 'You can afford it today ... let tomorrow take care of itself!'

So the seemingly trivial matter of extending credit to someone that may not be able to pay when interest rates changed causes some unexpected surprises.  What were those surprises and how did those surprises effect the economy.

#1 Action - Many people bought homes with subprime mortgages.  These borrowers would not have been able to purchase using conventional loans. 

#1 Surprise - Allowing many more people easy financing pushed demand and prices for homes through the roof simple supply and demand.

#2 Action - Loans are not serviced by originator in most cases and are packaged and sold.  This has worked very well and is a great way for local lenders and banks to diversify their loan portfolio.  Subprime loans have a much larger return and were eagerly purchased by banks and institutional investors.

#2 Surprise - The demand for these package of loans caused less time to be spent analyzing the actual loans and collateral used in the pool of mortgages ... hence more risk.  Additionally, these pools of mortgages were chopped and sliced and diced into many different assets that were sold to other banks and institutions making valuation of the mortgage pool very difficult. 

#3 Action - Assets that are difficult to value are difficult to sell and since regulations require banks and public institutions to book MARKET value many banks are having to write-off BILLIONS of dollars.  This is not to say that the value of these loans will eventually come-back and be a windfall to the banks ... but time will only tell.

#3 Surprise - Just how many banks were involved in purchasing and repackaging loans and how deep these loans were into the assets of large institutions.

Five years from now we will see the results of this crisis and hopefully our children will be better prepared to avoid this mistake ... but probably NOT ... we didn't learn from the S&L problems and our current problem is erily similar.