Actually, this isn’t just a U.S. thing. There was a story out last week that things in the U.K. real estate market might be even worse than in the U.S. Also, there seems to be quite a bit of exposure to this stuff in Europe.
Basically, it all comes down to lenders loosening their credit standards and lending to folks who probably shouldn’t have been borrowing that kind of money. A lot of people really strained their financial situation to buy real estate. Some of those who were investors in the property market got caught when the market rolled over. Meanwhile, some of those who bought new homes got caught by adjustments to their interest rates, and thus their monthly payments. Mortgage foreclosure rates, especially in areas like California where the property market was hottest, are running quite high.
There are mortgage backed securities in portfolios all over the world. When people can’t repay their mortgages, the value of those securities drop.
Basically, I look at it like this. Investors in mortgage securities (to include those front line lenders) got greedy. They didn’t think properly about the risk side of things. The market went against them and they’ve taken a big hit. Sounds like trading, doesn’t it?