Ack! Wall Street's woesFollow

Depends.

Buying it with a Credit Card gives you insurance against failure of the product or service if you have the cash to pay off the CC bill.

Credit Cards aren't teh ebil. Irresponsible borrowing is.

When a redneck takes out a $100,000 mortgage against a $80 a week paycheck, we expect rednecks to make such stupid calls.

When corporate financiers lend on the basis that said redneck is good for the $100K, the bank deserves to go under.

Yes, bailouts should be sparingly doled out on a basis of if it is good for the national ecomomy as a whole. Regulation or deregulation should be enacted on a basis of what is best for the economy.

But ultimately, the banks were just following the people with bad credit, thus should be allowed to suffer the consequences of their actions, especially since they should know better.

Totem

You would think so wouldn't you? Unfortunately, the Bush administration doesn't seem understand this concept either.

You're missing another point here. These people were told they could afford the mortgage. In some cases, they were blatantly lied to. Americans are unfortunately not known for their ability to read the fine print. It doesn't help that the contractual language of a mortgage is really freaking hard to read and understand. Most people, who having been told they can finally afford their dream home, are more than happy to wave the pen around and initial a dozen places without reading a single word.

Want to know why I didn't play the mortgage game when they were telling me I could with my crappy job and crappy credit? Because I do read the fine print. Some people trusted mortgage brokes who said, "Oh no no, ARMs don't have an interest rate hike. It just means the interest rate follows the market. So your interest rate could even go down in a few years!"

The regulations in question, however, would have automatically denied many people had they not been loosened around 2002. Traditionally, it was up to the bank to assess the risk, not the individual. Those folks certainly didn't expect to lose their jobs, or watch their 300K home drop to 200K over the course of a single year.

One of the better pieces of financial advice my father gave me was: If someone offers you around 7% fixed, read the fine print. If they're not ******** you, take it and don't ever refinance that mortgage because you'll never get a better deal.

Until my income and credit are both good enough to qualify me for that (I'm already at number one, and my credit is slowly improving now that I've paid off the credit cards), then I'm not going to trust a bank that tells me I can get a morgage.

Yup. That is the case. I don't actually agree with Totem on this one. The people who should have been assessing the risk are the lenders, not the borrowers. In this case, they were deliberately putting people into mortgages that they knew would almost certainly default in a few years (or would eternally have to be refinanced, putting more cash into the industry).

The problem is that at every stage of the lending game, each lender thought they were ok because the next layer was covering their debt. At the top of the ladder were the big credit organizations who believed that they were covered by the government, so it didn't matter. As I mentioned in my last post, we used to simply fund those programs from the federal budget. The only real difference is that now we're funding it in arrears rather than up front. Which is a really dumb way to do it, doubly so since they switched to that method specifically because they knew that the government wouldn't or couldn't afford to fund the kind of loans they'd need to hand out to allow poor folks to own homes.

The folks doing the loans at the ground level were responding according to the market realities around them. The problem was really higher up IMO. Sure. They took advantages of it, but you have to assume that's going to happen.




Oddly enough, this is a true statement though. The part that wasn't typically made clear was that the interest amount they started paying was essentially an "introductory rate", just like you see with the credit card offers. The rate you adjust to is the "normal" rate based on your credit score and the current lending rates in the market. It can and will go up and down over time.

So they didn't technically lie. What happens is that they don't paint the whole picture for the person buying a home. They're led to believe that the rate they pay is "normal", but may go up or down from that point over time. Nope. The rate they start out at is typically 2/3rds to 1/2 of the real rate, and it adjusts from there. So they take out a loan at a payment rate they can just barely afford, then when the payments go up to the normal rate, they can't afford it anymore.


I still think the best way to prevent that isn't with hard regulation, but a hard lack of safety net for the lenders. Make them eat the cost of a default and they'll be more careful in terms of who they lend to. The end result is ultimately the same though: You can't get a loan unless you meet the criteria.



That's a common misconception. The only changes made allowed different types of financial institutions to merge, which *can* create a conflict of interest situation, but really didn't have much if any impact on this at all. The rise of sub-prime loans started back in the mid-90s, not in 2002. It increased over time, not because of any specific regulatory change, but really as a result of the housing price "bubble" (which started in the mid to late 90s). As housing costs went up, the number of people who could qualify for normal loans went down. More people could only buy a home by using sub-prime loans. The increase in those types of loans was a result of the rising cost to buy a home, nothing else...



Yes. Because the housing price "bubble" burst. Do you see how that's the real issue here? As the bubble grew, people had to utilize more and more sub-prime loans to buy a home. When it burst, not only were they unable to make their payments, but they were unable to refinance due to the loss of equity in the property.


While you can find tons of articles out there pointing to this or that change to various lending regulations over the last 10 years, none of them can really define *why* that change had a significant impact. It's the old "correlation/causation" issue again. Just because there were a handful of regulation changes in the period right before prices crashed and sub-prime mortgages suddenly became a huge problem doesn't mean that those regulations actually caused the problem in any way at all. There are changes to those regulations all the time. Sometimes they are followed by banking or lending problems. Sometimes they aren't.

Another way to look at it is that there are always changes being made to the regulations. So, anytime there's a problem you could make the same argument that the regulation changes caused the problem. That doesn't make it true though...

*cough*

Adjusting interest and lending rates is one of the mechanisms used by the free market to make adjustments.

Just sayin'

That's one of the reasons I liked our loan guy at US Bank. He came to us and said "Well I can approve you for a $200,000 home, but the house would own you, you wouldn't own the house."

Ended up getting a loan for a house that we're very happy with, in a great neighborhood, and the cost was within reason ($134,000).

Edited, Sep 16th 2008 3:59pm by Wint

Stunningly, gbaji isn't wrong on this point. He is misleading, however, since it is not *only* or even *mostly* the liberals who want this, but basically everyone in the federal government.

gbaji is just using highly irregular definitions, such as liberal for anyone who wants government to do, basically, anything beyond what it would have done, say, 200 years ago.

First off. Let me correct a misunderstanding. I'm not limiting my statement to just the last decade or two. I thought that was clear from my earlier posts on this subject. The core conditions that led to this problem have been around for at least 30-40 years. They ultimately stem from the decision to privatize the lending industry in the US, but IMO it wasn't the privatization itself that caused the problem but the details of the privatization and how it interacted with the government.



You are correct. It was not "only" the liberals. However, the movement to privatize Fannie Mae (and build Freddie Mac as a privatized GSA in the first place) was supported by the two different "sides" for two completely different reason.

Conservatives wanted them privatized because they honestly believe that private individuals pursuing a profit motive will both tend to do better financially over time and *also* tend to have an incentive not to make the kind of mistakes that have lead to this current problem. Let me be clear here though. That really only works if those private individuals know that they can reap profits from good decisions, but risk losses if they make bad ones. If they believe that they don't suffer risk, or if that risk is limited, this model doesn't work as well (it does still end up being more efficient, but can lead to more risky behavior as we've seen).

Liberals of the day (1970s if you're curious) wanted a way to use the lending agencies to do wealth distribution. The problem is that the structure put in place during the New Deal funded the lending agencies (like Fannie Mae) directly out of the budget. Sometimes, they'd come out ahead, sometimes behind. The point is that because it was tracked as a budget item, there was an automatic resistance to doing anything that would increase the apparent "cost" to the taxpayer. But they wanted to be able to offer "deals" to needy people. Specifically, they wanted to offer deals to minorities groups to help offset their current statistically higher rate of poverty (just read a Smash post on the subject and you'll understand the thinking). They had a hard time doing this because it would effectively have to be budgeted and would be tracked and recorded. They actually realized that the current system was preventing minority groups from being able to get loans and didn't like that one bit.


The "solution" was to privatize the process. The Conservatives got what they wanted, but with a huge caveat. The GSA lending agencies would receive preferential terms from the Fed, but only if they complied with sets of requirements. These included essentially "affirmative action" lending programs and what we call today "subprime" loans. The intention was to give poor people better terms and better loans with the belief that if they were able to own their own homes or businesses a bit more easily it would help balance the scales so to speak. By privatizing this, as I pointed out to Samira, it effectively hides the "cost" since it's buried inside the differential value of the preferential Fed rate they received.



Let me reiterate something as well. There really weren't any significant regulatory changes in the last decade or so that "caused" the subprime mortgage problem. What really caused it was a housing "bubble", which started in the mid 90s. We can speculate as to why that happened. It could be lots of things. Changes in the rate of new home construction. Changes in the job market. Could be anything really and I honestly haven't investigated this that much. The point is that housing values started to go up faster than other areas of the economy. What this means is that housing became a very nice investment, while simultaneously becoming more expensive to buy.

For the investors and house-flippers, this wasn't too big of a deal, since the cost was still essentially relative (until the bubble collapse that is, but that's a normal bubble effect). What really screwed the pooch though was that there are still a lot of people who are trying to buy homes for themselves to live in. These people are exactly the category for which the GSA lenders get their preferential deals. Thus, there's incentive to give them loans at any terms. This meant they had to give out more subprime loans then normal. This meant that profits on houses now *required* a faster growing housing market values. And in that kind of market, perception often leads reality. This speculation caused the housing market to increase even faster, which lead to even more subprime loans being required to fill the housing requirements for people buying their own homes.


This effect continued to grow for about a decade. As long as it continued to grow, those in the lending business were "ok", but they were now essentially reliant on it continuing to grow at that accelerated rate, which in turn would increase the need for subprimes, which only made things worse. If the bubble had collapsed after a few years, it probably wouldn't have done much damage. But it continued for much longer then that, increasing the potential correction over time until it reached its current level.


My point is that I really don't think that the current mortgage crisis, credit crunch, or whatever you want to call it is really the result of any specific regulatory change. Lots of people try to pin it on this change or that change, but none of them really make much sense. I believe that this was simply a landmine inherent in the way our GSA lending system was set up 30-40 years ago, and it just happened to take this long before the conditions were right for it to bite us in the butts


Does that clarify it a bit?

And now the Fed moves to bail out AIG.

So the two biggest mortgage lenders and the biggest insurance consortium are all under Federal control now. Go go free market privatization.



Woo! Free market economy is stable and benevolent! Government oversight BAD!



Republicans: fUCking up the concept of small government since 1929.