11/05/2008 05:12 am ET | Updated May 25, 2011


It seems that every significant event in history leads to a new vocabulary - new words or, old words and phrases used in new ways.

The last year has been illustrative as writers and commentators struggle to find words or phrases to describe unique situations related to the housing and credit crises. Here are ten of my favorite examples:

SUBPRIME: this word, not even in recent editions of Webster's Dictionary, came into its own in 2006. In fact, in 2007 it was voted "word of the year" by the American Dialetic Association, just nudging out "waterboarding."

TOXIC DERIVATIVES: financial instruments that were created out of or intertwined with the yields of other financial instruments that are contaminated by underlying assets (mortgages) which stink.

CRAM DOWN: what bankruptcy judges can do to debtors in a reorganization - but not to lenders who secure a primary residence with a first mortgage.

NEGATIVE AMORTIZATION: this results when nutty payment-option loans are made to borrowers who prefer to pay (and are allowed to pay) less than what is technically due - the presumption being that everyone will catch up as house prices rise (ouch).

SHORT SALES: perhaps the bulk of housing sales today - when a house sells for less than the debt against it and the payment to the lender therefore comes up "short."

GOVERNMENT SPONSORED ENTITIES: organizations (like Fannie Mae) which are implicitly backed by the U.S. until, heaven forbid, the implicit guarantee has to actually become explicit.

FORECLOSURE MITIGATION: too many syllables for the basic principle that lenders should be working with borrowers to help restructure loans.

DELEVERAGE: as the period 2000 - 2006 was a time of an enormous increase in residential debt (from $6 trillion to $13 trillion), we are now in a period when the system is unwinding - or deleveraging.

MORAL HAZARD: a totally confusing description for the principle that people take dumb risks when none of their own money is at risk.

UNJUST ENRICHMENT: this phrase has been around for a while of course but in reading the just printed Bailout Bill (The Emergency Stabilization Act of 2008), I feel better to find that Section 101(e) instructs the Secretary of the Treasury "to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset."

OK, so here is how I describe our current problem:

There is too much subprime debt and negative amortization as the result of lenders operating without moral hazard, who could then sell the crummy debt to government-sponsored entities with the result being lots of deleveraging and tons of short sales. A new law was passed to address this situation which will help Wall Street and to a lesser extent homeowners with some amount of foreclosure mitigation (but no cram downs); fortunately, however, the risk of unjust enrichment to investors is limited by this law's prohibition on the purchase of financial instruments at a price exceeding the inexplicable numbers people paid for smelly and toxic derivatives.

Jim Randel is the author of the just-published book, The Skinny on the Housing Crisis.