Product Details

• Amazon Sales Rank: #3391 in Books
• Published on: 2008-07-19
• Original language: English
• Number of items: 1
• Binding: Hardcover
• 288 pages

Review
As seen on CNN Issue #1, CNBC's Kudlow & Company and Fox Business with Dagen McDowell

From the Back Cover
The subprime financial crisis is the decade's #1 financial story. What happened? How did it occur? And how can we prevent similar crises from happening again? Dr. Mark Zandi answers all these critical questions - systematically, carefully, and in plain English. Zandi begins with a fast-paced "history" of the crisis: where it started, how it spread, and where the fallout has landed. Next, he illuminates its deepest causes, ranging from the psychology of homeownership to Alan Greenspan's missteps. You'll watch the "flippers" at work and the real estate agents who cheered them on. You'll learn how Internet technology and access to global capital transformed mortgage lending, helping irresponsible lenders "drive out" good ones. Zandi demystifies the complex financial engineering that enabled lenders to hide growing risks and shows how global investors eagerly bought in, despite key warning signs. You'll discover how homebuilders contributed to the crisis, and how flummoxed regulators and policymakers failed to prevent it.  Zandi offers indispensable advice for investors who must recognize emerging bubbles, policymakers who must improve oversight and citizens who must reduce their risks, so they can survive whatever comes next.

About the Author

Mark Zandi is Chief Economist and co-founder of Moody’s Economy.com, Inc., where he directs the firm’s research and consulting activities. Moody’s Economy.com is an independent subsidiary of the Moody’s Corporation and provides economic research and consulting services to global businesses, governments and other institutions. His research interests include macroeconomic and financial economics, and his recent areas of research include an assessment of the economic impacts of various tax and government spending policies, the incorporation of economic information into credit risk analysis, and an assessment of the appropriate policy response to real estate and stock market bubbles. He received his PhD from the University of Pennsylvania, where he did his PhD research with Gerard Adams and Nobel Laureate Lawrence Klein, and his BS degree from the Wharton School at the University of Pennsylvania.

Customer Reviews

Good ideas and info
Good for buying a home but not in the typical sense, for me. It was more of a business of buying a home or houses wisely type of a book, not for your average Joe and Anne so much aas for those w/ a bit more to spend.
Still in all , good financial advice and ideas etc.See an excerpt to see if it's for you.

Easy to read expose of the Sub-Prime guilty parties
In this age of full disclosure, I received this book free from the Amazon Vine program....with the condition that I publish a book review.

I may have purchased this book anyway. Back in the middle of 2007 when the sub-prime problem first surfaced......I remember a talking head on TV saying the sub-prime issue would not become a problem. His rationale was that sub-prime only represented a single digit percentage of the total mortgage market......and therefore it would have no major impact on financial markets......even if all sub-prime debt went bad. Boy was he wrong!! I have been curious how the sub-prime fiasco almost brought down the entire world financial markets.

Another disclaimer is that I have not personally been involved much with mortgage loans. My first mortgage was back in 1978. It was a 30 year fixed mortgage, and since I only put 10% down, it was mandatory to have mortgage insurance......until my equity reached 20%. I got additional 30 year fixed mortgages in 1980, 1994, and 1995 due to job location changes. In 1999, I got a variable rate loan on a new home.......put 50% down......and then converted to a 15 year fixed rate in early 2007. I also live in Illinois, not one of the national hotbed markets for sub-prime lending.

Zandi says there has been a financial markets panic about every 10 years. He predicts the next one will involve U.S. government debt with all our under-funded liabilities. Other authors have said there is a stock market crisis about every 25 years........because it takes this long for the "burned" generation to retire and be replaced with youngsters who have no memory of the last bubble.

Zandi explains the sequence of the sub-prime fiasco like this:

1. Fed lowered interest rates after 9/11 to stimulate the economy
2. Fed was not worried about creating inflation because the shift in manufacturing to China actually threatened deflation, not inflation
3. With returns on savings accounts being so low, plus the stock market going nowhere after the Tech stock bubble burst.......people chose to invest in their homes
4. Foreign countries could not get decent returns on fixed income investments due to low interest rates......so they chose to buy slightly higher yielding mortgage backed investments
5. Local banks changed from being prudent lenders holding mortgages to simply financial intermediaries driven by loan processing fees. Since they no longer held any mortgages, they didn't have to worry about making sure they were issuing loans that homeowners could really afford.
6. New companies jumped into the mortgage lending market ...with the same motives as the banks. The majority of borrowers did not even realize how risky their new loans were....especially if home prices declined.
7. Wall Street created exotic mortgage backed financial instruments and marketed their higher returns.
8. The Federal Reserve Chairman and all the regulators were asleep at the wheel.
9. Financial rating firms completely missed the boat on how risky these new financial instruments really were.
10. Eventually the music stopped.....there were no people left to keep bidding up the prices of homes. The house of cards came tumbling down.


Zandi points out that sub-prime mortgages peaked at ½ of all mortgage originations.

A way was found to avoid the mortgage insurance if you put down less than 20%. You simply borrowed 80% on the first loan, then immediately took out a 2nd loan for the remaining 20%......apparently mortgage insurance is not required on either the 1st or 2nd loan.

Verification of income also went out the window.

Zandi points out that Americans lead the world in terms of how much housing cost we incur. Americans spend 33% of spending on their homes, while New Zealand spends 25%, France 20% and Japan 14%.

Zandi points out that at the peak of the boom in 2006, foreign investors owned 1/3 of all U.S. mortgages.

Zandi also points out that the price-to-rent ratio is a good bubble indicator.......analogous to the PE ratio in stocks. This ratio has been about 17 the last 25 years......but it peaked at 25 at the height of the boom. For this ratio to return to its 25 year average of 17, national U.S. house prices must drop 25%........and the hottest markets must drop 35%.

The author says the sub-prime bubble is 4 times as bad as the S&L fiasco ($1 Trillion versus $250B).

The author has some recommendations to avoid another sub-prime crisis including:

1. Lenders must verify income and assets
2. Lenders must verify borrowers are able to pay back the loan
3. Mandatory escrow for taxes and insurance
4. Start teaching personal finance in high school

I found the book easy to read and entertaining. However, I got very frustrated with the color coding of his charts. I could not distinguish what the variables were in most of his charts. Maybe he made them in color, and then the black-white conversion process made them illegible.

Given my background, I am shocked at how loose the lending process has become compared to 20 or 30 years ago. As the author points out, everyone in the lending food chain assumed "the other guy" had checked out the quality of the loan made...and in reality nobody checked it out.

After reading about the Tulip bulb and South Seas bubble......plus living through the 1989 S&L crisis, the 2000 Tech wreck, and the 2007 sub-prime fiasco.........this book has help give me a better idea of how to recognize the next financial bubble.

Some of the key indicators of bubbles include:

1. "It's different this time"
2. TV shows and advertisements on speculating including store owners who sell stock instead of their normal goods (Tulip craze), ads showing taxi drivers who quit hauling passengers and day-trade (Tech Stocks), and TV shows dedicated to flipping houses
3. Historic valuation ratios are far exceeded (Tulip bulbs, PE ratios of 100 for Tech Stocks, Price-to-rent ratio for housing)


All in all, I thought the author did a good job of exposing the role of each member in the housing loan food chain had in creating the sub-prime mess.




If you are done speculating in the housing market, these books on conventional stock and bond investing may help you slowly grow more wealthy:

Index Mutual Funds: How to Simplify Your Financial Life and Beat the Pro's
The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing

Reader's digest on subprime mortgage disaster
I must say that I am not an economist, so I was initially afraid if I will understand what author has to say in this book. I am glad to report that this book is easy to read and even the average Joe (like myself) can understand and follow the explanation that the author has laid out about the subprime mortgage financial shock that has shaken our nation. Also, I was ready to be judgemental of the author, since he is employeed at division of Moody's. After all, Moody was the first one who should have sent warning signs to the nation about the problem piling up in the mortgage, banking and housing industry. Well, author gets on defensive right from the start explaining that he owned to company that got acquired by Moody's, so while he is in the "establishment" he is not truly part of it. If the book has to be some sort of redemption on his career or moral standing, then may Dr. Zandi be redeemed. In short, book explains the housing boom and economic well-being in mid 1990s that enabled people more than ever to start buying homes. Banking industry has built financial system of mortgage loans, securities and insurance that was profiting; professional house flippers were getting rich, construction companies prospered, and with internet widely available and accepted, mortgage lenders were everywhere. Soon enough, the business was for grabs and with lowered mortgage rates, seemed to boom more than ever. But then a couple of other external things have happened to shake the equilibrium: 9/11 has forced people to travel less and focus more locally, US economy started to slow down, gas prices soared, food became more expensive, China became a member of the WTO and with their economic inexperience forced deflation that fed inflation and disrupted economic prosperity and well being of not only US but also countries like Mexico and Poland. Americans, not used to saving money were soon drained of their cash and when people started loosing jobs, and flippers were not longer buying houses but only selling houses, bubble was ready to burst. At the end of the book, Dr. Zandi proposes some changes that could help industry get back on the right track. But what I find scary is that I have learnt that Americans are not used to saving money, most people do not understand that they should not be spending more than 25% of their take home income on housing expenses, many of the subprime borrowers should not have been home owners in the first place and it is difficult to feel sorry for them now when one realizes that they have borrowed 100% of their house loan from the lenders. Elite from the Federal Reserve has misguided notion that people change homes every 10 years due to family growth or job change and is unable and unwilling to understand the middle class America financial ignorance in managing their own budget. For me, this book says that while globalization is not wrong, America and the world will have to watch out for the countries that will undercut pricing of any goods to the point of deflation for the sake of gaining market share and damaging the rest of the world in the process. This financial crises should have thought the world a lot and I can only hope that there are more people like Dr. Zandi that take this issue seriously and will focus on it in the future. Bubbles will continue to exist but economists have still not figured out the way to determine when and how they will burst. So to remain unscathed, one has to be literate, at least on the basic level, on the rules of the economy. This book is one way to start that kind of education for the general public.