Meltdown: What Happened and Where We Go From Here

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  darinp10/01/08 Report as spam
  1

  Both parties are to blame

  And a few homeowners that knew they could not make the payments...
  
  At the same time that Phil Gramm was helping the US catch up to European deregulation by allowing all sorts of financial companies to merge, President Clinton was pressuring Freddie and Fannie to loosen the underwriting standards so that more Americans could afford home ownership. The problems were further exacerbated by the SEC allowing investment banks to double their leverage in 2004 and greed at mortgage originating companies. Finally, people sought mortgages to buy houses that they were planning to flip (quick money as real estate prices skyrocketed) and optimists that thought they could afford a house (via incredible teaser rates and payments) once their rates reset (at the worst they could simply refinance). Everyone wants to point fingers, but the truth is that everyone wanted to ride the wave and live beyond their means or make a ton of money because both parties allowed it to happen. Neither party tried to derail the other because the economy was growing on the back of the real estate market.
  
  Only a fool would believe that this plan will stop the bleeding. Economic cycles occur naturally and we have yet to bottom out during this one. There is no plan that will permanently hide the poor investments that people made in either mortgages, CDOs, or credit default swaps. We can try to lessen the pain of this economic normalization, but often the supposed 'cure' is going to deliver results that are worse than the disease. That is why both parties are correct in inserting their own provisions and those provisions are often in conflict with one another. There is not perfect solution. We must simply ride this out the best we can.
  
  Maybe we should simply refinance everyone's homes at 50-year terms and a low fixed rate, but wait, people who are over-extended could still not afford their lavish homes. They will still default and be evicted... especially if they have recently lost their job.
  
  Maybe we should fine everyone who made a lot of money by taking advantage of the rules and put the politicians who participated by voting for or not fighting against the laws and rules that allowed the economy to grow over the past ten years. But wait, that would require a huge investigation into every facet of American history over the past 15 years and who would run that investigation since all of the politicians and many of their financial supporters would be on the losing end of such an expose'?
  
  I am not as interested in pointing fingers as I am in taking a step back and seeing what the lessons learned are and if we can find anyone in Washington who is willing to champion the changes required to really prevent this going forward. I find it interesting that we are all so shocked when we are facing the consequences of repealing a law (Glass-Steagall Act of 1933) that was put into place as a result of actions that led to the Great Depression. "What, are we facing another Great Depression? Why? How did that happen?"
  
  I wish we could throw out all of our existing regulations and start fresh with an far-less complicated set of rules that would allow us to operate as a free market economy (as much as a country can) yet protect us from greed and corruption (as much as laws can). Some decent common sense and historical perspective would be such a welcome relief in this time of political campaigning and economic uncertainty.

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  LWeller210/01/08 Report as spam
  2

  RE: Meltdown: What Happened and Where We Go From Here

  It started... with low interest rates for too long. Low interest rates initially allowed a percentage of the population to qualify for a home. Continued low rates continued the rise in home values (low interest rates = higher prices; high interest rates = lower prices). Mortgage lenders, real estate agents, and others whose take home pay is tied to home values, wanted in on the action and began qualifying everyone they could for a loan. Translated, that means that they gave away loans to everyone they could knowing full well that the "homeowners" would eventually default. This caused moer homes to sell and, of course, home prices to inflate even more. Circle back to the take home pay incentive and lenders, real estate agents, etc., went bonkers trying to give everyone under the sun a loan - again knowing full well they would default.
  
  In the midst of this major hyperinflation, still, low interest rates were maintained (guess whose fault that was?). They likely calculated that homeowners would take a second on their mortgages (for an inflated price they didn't work for) and pour money into the economy now - while those purchasing hyperinflated-priced homes would be paying off this "loan" or "T-A-X" every single month on a 30 year loan. Yes, it was rob Peter to pay Paul and Mary to spend, spend, spend their and our way out of a downturn in the economy. ...while Peter works harder and scrimps and saves every month for 30 years to pay it off.
  
  Not to mention all the money junkies who saw the sign (dollar sign) and purchased a second or third home (or more) thinking they would make money on the deal - once again, causing home prices to raise in response to demand.
  
  And then, when home values began to fall (my cat could have predicted this), even those who could have afforded to pay the mortgage(s) decided to walk away because they didn't want to take the loss - this caused home values to drop even more, which caused more people to walk away. (This should be illegal. If individuals decide that real estate is where they want to gamble, it's not a matter of "if the price goes up, you win; but if the price falls, walk and stick it to your fellow taxpayers.)
  
  And who on this planet didn't see this coming if they had their eyes wide open? Yet still, people are visualizing that the home they purchased five years ago for $150,000, that two years ago was valued at $700,000, STILL believe that their home will go up again in value in a few years.
  
  Who is going to buy these homes? What percentage of the population can qualify for such loans? These numbers were known and still are known. So when homes are flying off the market, economists and just about anyone with a lick of sense MUST know that a scam is underway.
  
  Period.

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  darinp10/02/08 Report as spam
  3

  RE: Meltdown: What Happened and Where We Go From Here

  I think that a few other things are also worth noting:
  
  1. The GSE's were pressured to make loans so that their stocks would rise, but their current default rates are actually extremely low (Freddie's is not that low, but FNMA's default rate is very low). The management teams at both entities did things that were clearly unethical to make their numbers. However, the vast majority of liar loans were not backed by the GSE's, they are in the private investor pools (securities insured by credit default swaps).
  
  2. Rates were low because money was in great supply. When the stock market became shaky in 2000, investors wanted a safer, guaranteed return. Real estate has always appeared to meet that criteria so that is where the money went. Right now rates are also extremely low, but there is no money. So even if you wanted to take advantage of the low rate, no one will give you the money at that low rate. There is a serious liquidity crisis.
  
  My 2 cents...