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Thread: Private sector loans, not Fannie or Freddie, triggered crisis

  1. #21
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    [QUOTE=BushyTheBeaver;2802409]I don't buy the laying of the housing crisis at the feet of lending to poor buyers. It doesn't pass the smell test. Not that it wasn't a piece of the puzzle--of course loans were made to poor people that shouldn't have been made. But loans were made to middle class buyers that shouldn't have been made either. Hell, there was a hot market in loans to illegal aliens, and no government program could have pressured lenders to do that without causing a giant stink--the brokers and lenders did that on their own.

    For more than 2 years I've been a faithful reader of irvinehousingblog.com. It's a fantastic blog that follows the housing bubble in Irvine California--a decidedly upscale town. No poor or minority borrowers there--just greedy middle to upper class flippers and HELOC abusers treating their houses like ATM machines to fund lavish lifestyles. In many cases the flippers were real estate agents themselves! Give it a look--it's a really interesting site.

    Also lets not forget Allan Greenspan's roll in this mess. His continued slashing of interest rates to soften the dotcom burst was key in producing the cheap money that fueled this insanity.[/QUOTE]

    Good post

    Of course this whole thing was a comedy of errors but the bottom line is that if the Fed had raised interest rates quicker the bubble would've never gotten so big and none of this would've happened. Imo, it's the single biggest reason for all of this considering how easily it could've been stopped.

  2. #22
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    [QUOTE=Roger Vick;2803029]What were the other parts of the problem?

    I'm not trying to be a wise-ass, I'm serious.[/QUOTE]

    CDOs, credit default swaps and other somewhat complex financial securities that were built at 30 or 40 to 1 leverage with home mortgages as the foundation. When mortgages went to crap banks realized that their exposure wasn't just to defaults or late payments, it was levered several times over because of derivatives.

  3. #23
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    [QUOTE=CTM;2803242]Good post

    Of course this whole thing was a comedy of errors but the bottom line is that if the Fed had raised interest rates quicker the bubble would've never gotten so big and [B]some[/B] of this would've happened. Imo, it's the single biggest reason for all of this considering how easily it could've been stopped.[/QUOTE]

    Fixed. I partially agree. Excessively low interest rates were part of the problem but there were many others including convoluted and almost outright illegal mortgage products being pitched to people who didn't take the time to understand them.

    [COLOR="SeaGreen"]"Oh, you mean my $920 mortgage payment could become $1850 in 24 months?"[/COLOR]

    [COLOR="SandyBrown"]"Yes, but that's okay because your house will probably be worth double in 2 years and you can refinance."[/COLOR]
    [COLOR="seagreen"]
    "Cool. Sign me up."[/COLOR]

  4. #24
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    [QUOTE=jetstream23;2803240]The problem isn't minorities, it's people with poor credit and substandard incomes to support mortgage payments. I think it's great to support increased prosperity among the minority population through home ownership goals but no one said that home ownership should be entered into at artificially high prices by people who couldn't afford it.[/QUOTE]

    That's true...but 'Pubs here are railing against Dems who "pressured" lenders into lowering lending standards under the same guise. Minorities tend to have lower incomes...so to increase minority homeownership their lending standards were relaxed.

    My post was more to show that under the influence of lobbyists, people from both sides of the aisle were convinced to ride this wave. ****...it was awesome while everyone was making boo koo dollars...but now fingers are flying everywhere...

  5. #25
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    [QUOTE=BushyTheBeaver;2802409]I don't buy the laying of the housing crisis at the feet of lending to poor buyers. It doesn't pass the smell test. Not that it wasn't a piece of the puzzle--of course loans were made to poor people that shouldn't have been made. But loans were made to middle class buyers that shouldn't have been made either. Hell, there was a hot market in loans to illegal aliens, and no government program could have pressured lenders to do that without causing a giant stink--the brokers and lenders did that on their own.

    For more than 2 years I've been a faithful reader of irvinehousingblog.com. It's a fantastic blog that follows the housing bubble in Irvine California--a decidedly upscale town. No poor or minority borrowers there--just greedy middle to upper class flippers and HELOC abusers treating their houses like ATM machines to fund lavish lifestyles. In many cases the flippers were real estate agents themselves! Give it a look--it's a really interesting site.

    [B]Also lets not forget Allan Greenspan's roll in this mess. His continued slashing of interest rates to soften the dotcom burst was key in producing the cheap money that fueled this insanity[/B].[/QUOTE]

    I think you need more research, but it is interesting to see how the "upscale" communities in california (up here in NorCal, it's BlackHawk, San Ramon, & Walnut Creek that are similar to the "upscale sprawl" of Orange County) are full of posers that act in an affluent manner. My informal poll as a mortgage broker showed maybe 2-3 people out of ten that had the income to really afford the 2 SUV's and 5 bedroom homes...the rest were wage slaves that were able to eek out a life and make the payments of all the trappings they bought.

    Greenspan definitely helped out in 2001...the econmy was pretty bad following 9/11...a prolonged refi-boom (so to speak) was helpful, but the Option ARM really changed the game. Even sub-primers could get that low rate...

  6. #26
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    [QUOTE=jetstream23;2803250]Fixed. I partially agree. Excessively low interest rates were part of the problem but there were many others including convoluted and almost outright illegal mortgage products being pitched to people who didn't take the time to understand them.

    [COLOR="SeaGreen"]"Oh, you mean my $920 mortgage payment could become $1850 in 24 months?"[/COLOR]

    [COLOR="SandyBrown"]"Yes, but that's okay because your house will probably be worth double in 2 years and you can refinance."[/COLOR]
    [COLOR="seagreen"]
    "Cool. Sign me up."[/COLOR][/QUOTE]

    This is EXACTLY the type of idea that brand-new Realtors were being coached to use. I sat in (as the in house lender) with a large Real Estate firm and I was continually rebuffed for saying it was going to get bad. But in 2005-2006 the escalating valuations blinded everyone, especially the Realtors that looked at homes/neighborhoods all day. people's homes has gone up some $80 grand in less than 1-2 years..."Go ahead..you can always cash out" forgetting that the prepay, realtor fees and taxes would eat up all that gain.

    I hate the Real Estate game.

  7. #27
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    [QUOTE=CTM;2803242]Good post

    Of course this whole thing was a comedy of errors but the bottom line is that if the Fed had raised interest rates quicker the bubble would've never gotten so big and none of this would've happened. Imo, it's the single biggest reason for all of this considering how easily it could've been stopped.[/QUOTE]

    Not wholly true; Bernanke really ****ed up byu raising rates too fast last year. Everyone remembers Jim Cramer's cry to "Open the credit window!", melting down on his show; Bernake was too late with too much.

  8. #28
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    Does anyone know how real estate works overseas in Europe and other places? Do they have real estate agents who function similar to how they function here?

    One interesting thing I heard today was that the banks over there don't even feel the need for credit default swaps (essentially insurance on mortgage defaults) because people don't walk away from their homes over there. The reason they don't just walk away is that there is Recourse allowed whereby the banks can go after your other assets, not just repossessing the house. They could take your savings, automoblies, other assets, etc. if you default on a loan and owe a lot of money. I like that idea.

  9. #29
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    Editorial

    Credit Frustrations

    As the economic crisis really begins to come to a head, we are hearing of ideas to stem off the housing credit problems. Let me begin by saying that I would be livid if some home loans are “forgiven” of the difference between their purchase price and current value. I would be even more livid if only those “in trouble” are bailed out of their mortgages, whether it is due to their poor decision-making, predator lending or as a result of the current economic climate. Most of the sub-prime borrowers assumed their homes would retain their value, so why should they be given a pass on the loss?

    Even worse, if the government bails the problem loans out by paying down the difference between the payoff of the original mortgage and the present worth of the home, how does that protect the homeowner? This creates a better opportunity for the banks to then take possession of the home knowing that they can now resell it and not be upside down. Don’t think for a minute that the banks are going to let a borrower gone bad have the opportunity to go bad again.

    My true reasons for being upset are simple. I will have to pay for the misfortune or the stupidity of others. I had to accept a sub-prime mortgage due to a bout with unemployment several years before I bought my house. However, I chose to move out of a state where house values were clearly over-the-top and bought a house in Texas that I could afford, even with a sub-prime mortgage. These two conscious decisions allow me to actually MAKE my mortgage payments like the vast majority of sub-prime borrowers while my home has retained its original value.

    I don’t see why the responsible people like me should be forced to bear the burden of those that failed. I have yet to hear of a bail-out for people like me, who have chugged away, faithfully paying high-interest while waiting for the credit score to inch its way upward to provide an ability to refinance at A-paper rates. Now that I have A-paper credit, I still can’t find a lender willing to underwrite a refinance since I am now self-employed. Further, why should those people that have managed their credit wisely and have had the fortune of being A-paper borrowers also be punished?

    Here is my suggestion for a “rescue” of the housing market: First, reform the credit reporting agencies. The megalopoly that controls the ability to obtain credit is far too powerful and credit scores do not allow for reasonable explanations of negative items and it is far too difficult to repair. Lenders that do manual common-sense underwriting have gone the way of the dinosaur.

    Second, instead of lowering a homeowner’s borrowed amount to resemble their current home value, I suggest a 3 phase approach to ALL loans. Phase 1; give all troubled borrowers a 3-month mortgage holiday. During these 3 months they can use their mortgage payment dollars to pay down other high interest overly-burdensome debt or sell their home. Phase 2; re-age the loans to account for the mortgage holiday. Phase 3, all borrowers can choose to re-cast their mortgage at a 30-year fixed rate for prime + 2% or some other reasonable margin. And finally, credit card companies should have stricter guidelines for maximum interest-rates as well as their penalties associated with them.

    This will stem off a large majority of home foreclosures, stabilize the banking lenders who would benefit from the new revenue stream instead of having to foreclose on houses that are worth less than they lent on them, reward good stewards of their bad mortgages and NOT negatively impact those folks that have traditional A-paper loans.

    The impetus for any rescue should be to give the people an opportunity to make good on their debt. Any assistance should be to that end.

  10. #30
    [QUOTE=cr726;2803063]And then Wall Street took that and ran with it.[/QUOTE]yes...the people holding these credit swaps ,the lehmans and aig's of the world,couldn't fund them.

  11. #31
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    [QUOTE=2foolish197;2803474]yes...the people holding these credit swaps ,the lehmans and aig's of the world,couldn't fund them.[/QUOTE]

    Wall Street is getting criticized incredibly, as it should be, but they are also paying the price immeasurably right now. It's real easy to point to the CEOs and high profile traders but a typical big bank probably employees about 50,000 people and many of them are pretty average analysts, secretaries, back office people, IT guys, Human Resources, etc. and not millionaire high-flyers. Even worse, most of them, if they have a lot of company stock in their 401(k)s, have taken a bigger beating than the rest of us in the recent market mess. Some people have watched their retirement savings cut in half AND lost their job all in a couple of weeks as banks fail.

  12. #32
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    [QUOTE=jetstream23;2803250]Fixed. I partially agree. Excessively low interest rates were part of the problem but there were many others including convoluted and almost outright illegal mortgage products being pitched to people who didn't take the time to understand them.

    [COLOR="SeaGreen"]"Oh, you mean my $920 mortgage payment could become $1850 in 24 months?"[/COLOR]

    [COLOR="SandyBrown"]"Yes, but that's okay because your house will probably be worth double in 2 years and you can refinance."[/COLOR]
    [COLOR="seagreen"]
    "Cool. Sign me up."[/COLOR][/QUOTE]

    Yes but the example you described perfectly illustrates why the bubble was the root problem. If Housing didn't appreciate so much so fast, nobody would've gotten that drunk and stupid to believe that it could never go down.

    The entire problem was this group delusion that people were suffering from where they thought housing would NEVER, NEVER? yes NEVER come down. As one of the few naysayers, I wish I had a dollar for every time I heard "god's not making anymore land" during those years..

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