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Sunday, June 15, 2008

About This Series

Today: Boom

Forces converge to fuel the biggest American housing boom since the 1950s: plunging interest rates, exotic new Wall Street securities that flood the mortgage industry with cash, and easier loan packages for immigrants and others with less-than-stellar credit.

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Monday: Bust

Banks and other mortgage lenders notice weakness in the housing market. New houses sit unsold and foreclosures rise as people who bought homes with adjustable-rate mortgages see sharp spikes in their monthly payments. Central bankers and other watchdogs are caught by surprise.

Tuesday: Aftermath

When subprime lenders implode, the contagion spreads quickly to Wall Street, which had packaged risky mortgage loans and sold the securities around the world. Investors panic that the housing collapse will reverberate through the rest of the economy.

Today's Characters

Kevin Connelly, from left, a mortgage broker in Vienna with Pinnacle Financial

David E. Zimmer, a young salesman of mortgage-backed securities in the Cleveland office of a Wall Street firm

Lewis Ranieri, a pioneer of mortgage finance at the Salomon Brothers investment bank

Edward Gramlich, a Fed governor who saw early signs of trouble

Alan Greenspan, outgoing chairman of the Federal Reserve

Ben S. Bernanke, incoming chairman of the Federal Reserve

A Glossary of the Bubble

Subprime mortgage: A home loan made to someone with a poor or incomplete credit history. Borrowers pay a higher-than-usual interest rate because of a higher risk that they might not make their payments.

Mortgage broker: A middleman who, for a fee, connects people looking to obtain a mortgage with a bank or financial institution willing to make a loan.

Mortgage lender: A bank or other financial institution that provides a loan to a borrower to cover the cost of buying a home. Sometimes the lender sells the loan to Wall Street, where it is packaged with many other loans to create a mortgage-backed security.

Mortgage-backed security: A bond that pays investors interest derived from the cash flow of a pool of hundreds or thousands of monthly mortgage payments. The securities, also known as collateralized mortgage obligations (CMOs), often slice the pool into sections -- called "tranches" -- that each carry different maturity dates and interest rates and are sold separately to investors.

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