The Subprime Crisis

My first thought is that the system worked.

The system where hedge funds and certain other things (like toxic waste CDOs) are limited to high net-worth individuals and institutions. For all the market problems, normal investors haven't been affected (unlike people who need mortgages).

It is unbelievable that hedge funds (and European banks) put their futures on things they couldn't really measure or understand. This should put the nail into much of the quant model. Instead of minting money, they're actually collecting insurance, collecting pennies on an annuity basis until every couple years the market collects dollars.

While the jumbo mortgage market has melted down, the normal people mortgage market appears to be going strong.

I do feel sad about the people who were counting on refinancing their ARM and now have that option closed. I am pretty surprised they didn't understand the terms of the loans and the risks they were taking up front.

I did. 4 years ago I was a perfect buyer for a 5 year ARM. My reset will be financially painful but survivable. I made a conscious financial decision which turned out to be a loss. Given the same situation (without knowing the future) I would make the same decision. Plenty of real estate investors took a financial risk and lost big. Hopefully they (like me) had this as part of a diversified financial portfolio.

I'm leaning towards mandatory financial education. Especially for people who can't come up with a "normal" down payment. A no down payment ARM really should be limited to knowledgable investors. Or at least someone who has had to go through an hour or two of basic finance and potential scenarios.

The biggest surprise is that savvy investors haven't jumped into the jumbo resale market. Or subprime/Alt-A with reasonable (20%+) downpayments. If there was a way to participate as an individual investor, I'd be all over it. This should be a down payment crisis, not a general availability crisis.

And for people who have relationships with credit unions or small banks (that hold mortgages and know local areas) the window is still open. The whole brokerage system of national lenders is great until it falls apart.