What two things have really been driving the market down since last summer? The housing market and the inefficiencies in the debt markets. Where better to look and see exactly how bad things are then at the securitization of home loans. Securitization of home loans refers to the process of bundling mortgages and selling them to investors.
From today's Wall Street Journal: "Securitizations of home loans totaled $19 billion on March [2008], compared with $218.6 billion in March 2007, when the U.S. housing market began its sharp decline, according to data research firm Dealogic."
Why have home loan securitizations declined by 91% in a year? Well first, people are buying less homes. When banks make a loan now, they can't turn around and sell it as easily to get cash to make another loan, so when the next guy walks in to get a mortgagae, they may not have enough cash to lend him, so then he can't buy a home, so home prices go down, so more people default on their mortgages, and it becomes harder to sell CDOs (or securitized mortgages). That is the vicious cycle we're in right now.
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