The New Subprime

Subprime. The word itself now breeds thoughts of failure, greed, and stupidity. We all know the story: Mortgage bankers lent money to anyone with a central nervous system; homeowners knowingly lied on their mortgage applications; Wall Street gladly bought it all without asking questions. The result was a trifecta of insanity like never before.

But subprime was 2007 and 2008's crisis. In fact, newly initiated subprime foreclosures actually decreased 16.7% over the past year.

Unfortunately, subprime's decelerating assault has given way to a bigger, badder offender: prime mortgages.

Prime mortgages are just what they seem -- loans made to people with good credit scores, documented income, and down payments. They're held in bulk by banks like Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) , and in crazy amounts by Freddie Mac (NYSE: FRE  ) and Fannie Mae (NYSE: FNM  ) .

But over the past year, prime mortgage foreclosures have been growing faster than any other mortgage segment. Have a look:

Mortgage Type

Y-O-Y Change
in Newly Initiated Foreclosures

Newly Initiated Foreclosures
(March 31, 2009)

Prime

25.6%

132,730

Alt-A

(6.9%)

56,948

Subprime

(16.7%)

64,628

Other

2.5%

36,614

Total

3.8%

290,920

Source: Comptroller of the Currency, Office of Thrift Supervision, June 2009.

Even though the default rate is significantly higher with subprime, the total amount of prime mortgages makes it one of -- if not the -- biggest areas of trouble. One year ago, there were around one-third more seriously delinquent subprime mortgages than prime mortgages. Today, that number has flipped, with seriously delinquent prime mortgages running roughly 38% higher than subprime.

Prime has, in a sense, become the new subprime.

It was bound to happen
What's causing the surge in prime foreclosures? Many things, to be sure, but one of the big ones is what I discussed last week: Homeowners that are underwater, or owe more than their home is worth.

A recent op-ed in the Wall Street Journal elaborates on this. Regression analysis compiled by a University of Texas economics professor shows that being underwater is by far the dominant cause of foreclosure. Factors that assign prime borrower status -- such as credit scores, monthly payments, and income -- aren't nearly as conducive to foreclosure as whether a homeowner owes more than their home is worth. As the article states:

[M]erely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan.

In other words, being "prime" really doesn't matter. If you're underwater, you have an incentive to walk away, regardless of whether you can afford your mortgage payment. Subprime borrowers were jettisoned early from the market because they couldn't afford their monthly payments. Prime borrowers are now defaulting because steadily falling home prices steadily increase their incentive to skip town.

Illusions of a bubble
The crazy giddiness of the real estate boom may also have helped to distort the designation of "prime borrower" status. CNBC's David Faber recently wrote a fantastic book on the housing meltdown that includes a passage from a hedge fund manager who describes exactly that:

Imagine you're a subprime borrower in 2004 and you refinanced your loan in 2005 into a bigger loan so you could cash out some money. So if you cash out and refinance, your credit score goes up because you just paid off a huge loan. So your first loan might have been subprime, but on your next loan you're a prime borrower.

In short, many "prime" borrowers might just be subprimers with inflated credit scores. This is also true for people who used the proceeds from home equity loans on one property as a down payment for another. The big down payment made the borrowers look financially fit, but it was all an illusion that didn't reflect their true creditworthiness. They were simply moving debt from one inflated house to another.

In addition, the housing bubble's income distortion also made millions appear more creditworthy than they really were. According to noted economist Mark Zandi, 23% of all new jobs created during the 2003-2006 recovery were housing-related. This includes everyone from mortgage bankers at Citigroup (NYSE: C  ) to construction workers at KB Home (NYSE: KBH  ) to (ostensibly) checkers at Home Depot (NYSE: HD  ) . To some degree, the prosperity of all of these jobs was artificially magnified. In a wildly extreme example, Faber's book describes people who went from delivering pizza to working as mortgage brokers making $20,000 a month. (I'd assume they ultimately wound up in the unemployment line). All of this created a stunning short-term illusion of prosperity that allowed armies of borrowers to qualify as "prime" when they were far, far from it.

All bubbles burst. As the financial blog Calculated Risk regularly puts it, "We're all subprime now."

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Home Depot is a Motley Fool Inside Value pick. The Fool has a disclosure policy.


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  • Report this Comment On July 07, 2009, at 4:39 PM, BMFPitt wrote:

    Prime isn't the new subprime, FHA is the new subprime. It's just barely above the "pulse and a signature" loan requirements of the bubble-era subprimes, but taxpayers are on the hook for all the losses. If you count the 8k bribe, they're actually PAYING people to take houses in a certain price range. What makes anyone think these loans will be paid back at any higher rate than they have been for the last few years - with the economy only getting worse?

  • Report this Comment On July 07, 2009, at 5:24 PM, fullswing wrote:

    I disagree with BMFPitt. FHA is financed through upfront premiums paid by all FHA borrowers (not taxpayers) on loans requiring full documentation, full appraisal, to finance owner occupied properties only. And since lenders are measured against their peers through a publicly available database called Neighborhood Watch, most lenders have self managed the credit criteria. As whole, FHA has been "buying" providing insurance into an already deflated housing market, while the private mortgage firms insured loans at the peak. In addition, FHA already has built-in loss mitigation tools, that the GSEs and Congress are now just creating for conventional mortages.

  • Report this Comment On July 07, 2009, at 5:25 PM, LessGovernment wrote:

    Here's a novel idea as to how to deal with Sub-Prime.

    Take over Fannie and Freddie and manage these companies more recklessly than ever before with the “new and improved” government management.

    Provide Fannie and Freddie unlimited taxpayer funding with the restriction of reasonable checks and balances as to loans made or backed totally removed.

    Put a man with close ties to the big banks in charge of the Treasury.

    Make Treasury and Federal Reserve policy that is favorable to the big banks at the expense of the taxpayers, especially those that will live in the future.

    Remove Mark to Market Accounting rules allowing the banks to temporarily hide unrecognized losses off balance sheet.

    Transfer the risk of the banking industry’s off balance sheet bad assets to the taxpayer.

    Have the Federal Reserve buy Treasury debt on credit thus making it appear that the Treasury debt has demand that is far greater than reality hiding the financial risk to the currency in the now ballooning balance sheet of the Federal Reserve.

    Remove any semblance of risk management at Fannie and Freddie by allowing the refinancing of underwater mortgages for 125% of appraised value.

    And finally, make the taxpayer ultimately responsible (as opposed to the banks and wall street and the ratings agencies that collectively caused the problem) for the future losses that will certainly come on these reckless and overly leveraged mortgages.

    Oh wait a miunute. This is exactly what the Mr. Obama has already done. Well, the people voted for change. Let's just hope that there is some change (pocket change) left for future taxpayers as we bury them in debt.

  • Report this Comment On July 07, 2009, at 5:28 PM, Ifix22 wrote:

    I agree with you wholeheartly

  • Report this Comment On July 07, 2009, at 5:38 PM, finishingnail23 wrote:

    The article doesn't talk about the "down payment" requirement which should surely mitigate the desire to walk away from a depressed market. If one is required to put 10 to 20% down, I'm going to think about it before I walk away from that house.

    How about marrying that aspect to the article. I'd be very interested in coorelation of down payment requirements with the "tendency" to forgo your responsiblities and just "walk away.".

  • Report this Comment On July 07, 2009, at 6:46 PM, xetn wrote:

    If you want to know the real cause of the housing bubble you should read Thomas Woods: "Meltdown". This will not only give you the reason for the housing problem, but will answer the cause and effects of boom/bust cycles.

    Hint: LessGovernment is on target with this issue.

    For a short-hand look at the problem you can read:

    http://mises.org/story/3539

  • Report this Comment On July 07, 2009, at 7:50 PM, LessGovernment wrote:

    HOW WE GOT INTO THIS MESS

    Is it Time for Revolution?

    Following the last great depression, Congress met and discussed the root causes of what killed the economy way back there in 1929. The result of their findings was that reckless behavior and speculative buying on wall street created a bubble that was not supportable by balance sheet assets. Stocks, banks, and life savings crashed as a result.

    In 1933,

    to keep this problem from occurring again, Congress created some support for the bank depositor in the form of the FDIC (Federal Deposit Insurance Corporation) and also mandated through the Glass-Steagall Act that banks that were federally insured would not be allowed to engage in insurance and other high risk businesses. If the government was going to insure your deposits at the local bank for your benefit and security, the local bank was going to behave and not engage in risky activities. We had learned a lesson in 1929 at great cost for the education, and this legislation was going to prevent the depression from happening again.

    In 1971,

    Congress passed the Federal Election Campaign Act which permitted Political Action Committees to make larger contributions to Congressional candidates than what was allowed by law for individuals. In short, Congress passed their own version of campaign finance reform that created the ability to have unlimited funding since there is no limit on the number of PAC's that can be created and nothing to prevent multiple PAC's from contributing to the same candidate. This (bad) legislation was intended to give the incumbent a definite edge over any challenger and help insure political dynasties.

    In 1974,

    Congress passed legislation called ERISA (Employee Retirement Income Security Act) through which the taxpayer would guarantee retirement expenses for any defined benefit plan that went into default. With this legislation also came the mandate for Congressional oversight through sub agencies that would require businesses to fully fund their plans. Well, oversight did not occur and plan administrators were allowed to use wildly optimistic assumptions to show the plans were funded when in fact they were not fully funded. These assumptions went something like this "The assets in the plan next year will earn 18% in the stock market, so we don't have to invest earnings into the plan and in fact, can remove money from the plan because based on our assumptions, the plan is over funded". As a result of the lack of oversight and enforcement, under funded retirement plans are now common. The Pension Benefit Guarantee Corporation (the fund now guaranteeing these plans that was created under ERISA) lacks sufficient funds to perform its function of guaranteeing these under funded plans. As a result of the lax oversight and the regulators allowing the use of the wildly optimistic assumptions as to funding needs, this Act will claim more and more taxpayer monies as more and more plans that have not been funded as required by law will have to be funded by the government (taxpayers). What has been set in motion is taxpayers with drastically reduced discretionary incomes for now and well into the future will now be the source of funding for the under funded plans that have on average much higher benefits than anything the average taxpayer now providing the funding will ever receive. Just another of the many unintended consequences of government run amuck as government drives headlong into socializing corporate losses to the taxpayer.

    In 1977,

    The Community Reinvestment Act (CRA) was passed. This act, as stated in its own words, "intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate income neighborhoods, consistent with safe and sound banking operations". What was intended, and what occurred through enforcement are two entirely different results. This Act would later become instrumental in the economic disaster of 2007, some 30 years after passage of this act, because this Act enabled Congress and at least one President to "manage" (socialize) banking, mortgages, and credit which directly caused an overall lowering of quality of the mortgages used to back securities sold around the world. This was especially true during the Clinton administration from which pressure was applied to Fannie Mae and Freddie Mac to ease the credit restrictions on the mortgages they were buying. This was done to allow those without sufficient credit to still have access to a mortgage with only a slight increase in the interest rate to be paid. In other words, under enforcement of this act, the higher risk of loaning money to less credit worthy applicants was not to be offset with higher potential rewards in the form of a much higher interest rate. In fact, the interest rate differential for the much higher risk of default was only 1 percentage point and even then for only two years if the loan was paid on time. This "socialist" approach to the mortgage industry was obviously dangerous, and accordingly, the alarm was sounded by New York times writer Steven A. Holmes in an article entitled Fannie Mae Eases Credit To Aid Mortgage Lending dated September 30, 1999 (Google it to read it). Unfortunately, few if any of those that read the article (including all members of Congress) understood the ultimate scope and horrific impact this credit easing would eventually have. Few if any also understood how this very credit easing would ultimately lead to a major problem in the banking industry due to the failure of derivatives based on the mortgages created using these lax credit standards. This act, as enforced and regulated, actually lowered the mortgage standards for the entire mortgage industry and helped create the atmosphere of lax enforcement that also allowed shoddy appraisal work, little or no verification of ability to repay the loan, sloppy ratings of collateralized debt instruments, and what later became known as "predatory lending". In addition, enforcement of this act time and again caused banks to pay what amounted to extortion in order to gain regulatory approval for a new branch or an acquisition of another bank. This Act, and its socialist enforcement severely weakened the banking and credit industries.

    In 1997,

    Congressional oversight allowed Citi Bank to buy Travelers Insurance even though this transaction was in total violation of the Glass-Steagall Act passed by Congress in 1933. Thus the illegal birth of the era of "Financial Services" in which banking businesses insured by the government through the FDIC and other agencies were now to be allowed to get involved in the riskier aspects of financial services such as insurance and investment banking while still being federally insured.

    In 1997,

    Congress granted the illegal new business entity now called Citi-Group an exemption to the Glass-Steagall Act so it could operate in the temporary legal status of violating the Glass-Steagall Act but do so with permission from Congress. This is about as close to a Congressional "Get out of jail Free" card as you will ever see. PAC's were at the heart of this exemption being granted.

    In 1999,

    the Graham-Leach-Bliley Act was passed basically repealing the Glass-Steagall Act altogether. Citi-Group, as well as many, many others, could now legally operate without the Glass-Steagall Act exemption granted by Congress. The doors were now wide open to mix federally insured banking with risky investment banking, insurance, and "insurance like" businesses such as credit default swaps. Out the window went the knowledge and lessens learned from the great depression, and the stage was now set for a repeat of history as PAC's applied pressure to Congress for more and more deregulation in exchange for more and more campaign funds. The only thing now standing between loosely regulated banking and federal insurance and total banking failure is the requirement to hold sufficient amounts of capital to backup the "insurance like" promises of credit default swaps and debt instruments and derivatives. The exact wording in this legislation as to these important aspects follows:

    Repeals the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act.

    Creates a new "financial holding company" under section 4 of the Bank Holding Company Act. Such holding company can engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities.

    Oddly, this act did ask for a study to be conducted on derivatives and their risk, but apparently, no one got the message or if they did, they either performed a bad study (surprised?) or they failed to share it with anyone. This act also shows that as early as 1999, there was growing concern over the Frankenstein of banking "sort-of-banking" that this legislation was bringing to life. Frankenstein would later be known as "to big to fail". The exact wording in this legislation as to this important aspect follows:

    Provides for a study of the use of subordinated debt to protect the financial system and deposit funds from "too big to fail" institutions and a study on the effect of financial modernization on the accessibility of small business and farm loans.

    This piece of legislation, not yet harmful enough, also reinforced the Community Reinvestment Act (CRA) of 1977 in a couple of significant and harmful ways. This was done by withholding Federal Reserve permits for a new branch or to form a new bank holding company if the entity applying for the permit did not rate "high" enough during the latest CRA compliance exam. CRA compliance regulators now had the power to stop a bank's growth or even withhold its permit to operate. This provision is referred to in the 1977 CRA paragraph above as having "…caused banks to pay what amounted to extortion". The exact wording (and it is despicable) in this legislation that did this follows:

    The Federal Reserve may not permit a company to form a financial holding company if any of its insured depository institution subsidiaries are not well capitalized and well managed, or did not receive at least a satisfactory rating in their most recent CRA exam.

    If any insured depository institution or insured depository institution affiliate of a financial holding company received less than a satisfactory rating in its most recent CRA exam, the appropriate Federal banking agency may not approve any additional new activities or acquisitions under the authorities granted under the Act.

    My Explanation of the above- If any single branch of your thousands of branches (if you are a large bank) did not "earn" a satisfactory rating from the CRA examiner, the entire banking operation had a big problem. The CRA examiner at this point has too much power, the CRA exam is too suggestive, and the CRA exam has absolutely nothing to do with sound banking practices, and in fact, throws sound banking out the window as the CRA forces banks to be politically correct at the expense of sound banking. This is where the banks were forced to pay "extortion" in the form of knowingly making bad loans in order to survive and prosper under CRA. This is a world gone mad and the entire world will pay a dear price for this in 2007-2008-2009-2010-2011 and beyond.

    In 2000,

    The Commodity Futures Modernization Act was passed with support from Fed Chairman Alan Greenspan and mostly Republican support in congress. It and was introduced and supported in the House as H. R. 5660 by Thomas Ewing (R-IL), Thomas J. Bliley, Jr. (R-VA), Larry Combest (R-TX), John J. LaFalce (D-NY), Jim Leach (R-IA), and was introduced and supported in the Senate as S. 3283 and was sponsored and supported by Sen. Richard Lugar (R-IN), Sen. Peter Fitzgerald (R-IL), Sen. Phil Gramm (R-TX), Sen. Chuck Hagel (R-NE), Sen. Thomas Harkin (D-IA), and Sen. Tim Johnson (D-SD).

    This Act was signed into law by President Bill Clinton (the same president that had been pushing Fannie and Freddie to lower credit standards on the loans they would buy) in December 2000

    What this Act did that was so bad was simply to make most over-the-counter derivatives contracts outside the regulatory purview of all federal agencies, even the Commodity Futures Trading Commission.

    With the new law on the books, the market for credit default swaps exploded from $632 billion outstanding in the first half of 2001, according to the International Swaps and Derivatives Association, to $62 trillion in the second half of 2007.

    -------------------------------------------------------------------------------------------------------

    The reader should take note that Congress has at this point:

    Removed the banking industry safeguards put in place following the great depression

    Forced banks to make what amounts to bad loans

    Forced Fannie Mae and Freddie Mac to lower their credit standards

    Forced Fannie and Freddie to buy the bad loans banks and other loan originators were being forced to make under the Community Reinvestment Act

    Allowed Fannie and Freddie to securitize and sell to the world AAA rated securitized debt that used bad loans as collateral

    Forced (through CRA enforcement policies) the entire banking industry to become politically correct regardless of risk and potential cost

    Failed to regulate the banking industry adequately

    Placed regulation responsibility of international banks onto states for the insurance like activities of the banks (an impossibility)

    Failed to regulate and enforce ERISA law

    Failed to ensure pension plans were adequately funded as required by law

    Allowed government insured banks to get more and more involved in the riskier banking functions regardless of the risk being transferred to the taxpayer.

    In short, Congressional legislation and lack of oversight had at this point put the entire economy on a course to disaster. This disaster could still have been avoided, but people, especially those in Congress, had to listen to the warnings. They didn't.

    In 2002 and 2003, with the stage set as described above, Congress failed to listen to the testimony in Congress, on the record, from experts that Fannie Mae and Freddie Mac now represented huge systemic risk to the entire financial system through the "assumed" risk that the GSE's were backed by the government. Keep in mind that at this point in time, the GSE's were, by act of Congress, NOT backed by the federal government. All that was being asked of Congress in this testimony was to simply make that fact clear, that no government guarantee existed.

    Instead, Congress (under the leadership of Barney Frank and others) pushed even harder for the GSE's to increase home ownership through purchasing even more risky mortgages with little or no money down and other obviously bad practices. In the process, the balance sheet exposure (risk to the taxpayer) increased from 132 billion of exposure in 1990, to 1.5 trillion in 2005, to 5.2 trillion in 2007. When the housing bubble began to pop in late 2005 or early 2006, Fannie and Freddie immediately fell into desperate financial condition due to the accounting irregularities on their books and their low grade collateral that was being used to back the trillions of dollars of securitized debt.

    Now, with the stage completely set for economic catastrophe, that is exactly what America got.

    There is only one reasonable reaction at this point in time and that is to Fire Congress. Do not vote for an incumbent ever in the future. Do not re-elect anyone. This, and only this, will remove the power and influence of the PAC's (bad legislation) and curtail the need to write ear marks to benefit special interests in exchange for campaign funds.

    The beauty of Capitalism is you free the brain power of millions of investors, and workers, and decision makers to borrow, deploy, and invest capital and assume risk. The true oversight in a capitalistic system is the freedom to fail should the taking of risk become excessive. This failure then allows those that managed risk to acquire the assets of the failed businesses at cents on the dollar and re-deploy those assets for the betterment of all.

    The short coming of socialism is that a few government leaders and/or un-elected appointees take charge and attempt to "manage" the economy through central planning, legislation, social engineering, and agenda driven oversight or lack thereof. We have already seen the impact of socialized banking through the Community Reinvestment Act and the Graham-Leach-Bliley Act as brought on by the PAC's that pushed so hard for this legislation. And we have seen the impact of politically correct enforcement of the Community Reinvestment Act and its impact on homeowners everywhere.

    In trying to use socialism to help a few, the socialism employed has harmed nearly all of us and put those that the socialist policies tried to help in even worse conditions going forward. Socialism does not and never will work because true oversight does not exist in Socialism as the freedom to fail has been removed and the removal of the ultimate oversight (failure) encourages risky behavior and transfers the consequences of taking on excessive risk to the taxpayer and future generations.

    In other words, Socialism robs from the taxpayer the funds needed to bail out the excessive risks taken by federally insured enterprises and activities. Just open your eyes and you can see this happening on a daily basis as with each "socialist fix" comes yet a new set of problems that require yet another "socialist fix" all the while the economy is pushed deeper and deeper into the abyss of debt and possible depression. The common thread woven through all these "fixes" is the confiscation of more and more taxpayer funds, and the corresponding lowering of discretionary income which decreases economic activity and standard of living. It (socialism) ends with a collapsed economy. A recent good example is the collapse of the Soviet Union. The USSR no longer exists. The USA is not far behind if we continue this folly.

    We have now reached the point where the Federal Reserve Bank itself is giving IOU's to the Treasury for the Treasury debt it is purchasing. In other words, we are now at the point of selling our debt on credit. This is simply nuts.

    ERISA funds are over committed, the FDIC is running low on funds and will need more from the Treasury, the federal highway fund is broke, Social Security is unfunded, Medicare is unfunded, federal retirement is unfunded, and now states are coming forward and asking to be bailed out of their own multi-billion dollar problems.

    We will most likely add over five trillion dollars of debt and exposure (guarantees) to our 9 trillion dollar November 2007 national debt before the end of 2011. Our unfunded obligations of Social Security, Medicare, federal retirement, and others now exceed 80 trillion dollars. And what is the government now trying to do? Are they cutting spending? Are they trying to get the financial house in order? No. They are trying to create yet another plan called government provided health care that they will also not be able to fund.

    If they want this plan, we should first insist that social security is put on a track of being totally funded first, and the same for Medicare, and the same for government retirement, and the same for the federal highway fund, and the same for PBGC, and the same for FDIC, and the same for FSLIC, and the same for all the others, or kill one or more of these plans if they can not be fully funded. Once all these unfunded obligations are totally funded or killed, then and only then should we proceed with any new entitlements. However, judging from the careless and reckless legislation from the past, and the speeches and promises of today, there is little hope that the new administration and Congress will be this logical.

    You have to look back at the government's ability to predict what these plans will cost to see how bad government's planning really is. For example, when social security was first introduced, it was funded with a 1% tax on the first $3000 of wages, or $30 per year. How has that funding mechanism stood the test of time and plan expansion? Well, today, the bite from payroll taxes is 15.3% of the first $102,000 ignoring the taxes applied above that point which are still substantial, but for arguments sake, I am keeping this simple. Plan expansion has resulted in tax expansion to the point that $30 per year has morphed into $15,606 dollars per year for higher compensated workers, yet these plans are still under funded.

    It obviously makes no difference how much the government takes in payroll taxes, these plans will never be fully funded because the government has not been able to save one thin dime in our 233 year history. And with the government tax bite growing all the time, the taxpayer due to tax creep is now nearing the position, or is already in the position of not being able to save. This is the quandary we now face. The government won't save and the taxpayer can't save so we borrow the money we need to run our lives from countries around the world and commit yet more tax dollars to debt service making the matter worse. This is ridiculous. What is even more ridiculous is the president wants to add yet another plan.

    Our new president is a man. Just a man. He, like any other man, can be wrong. Someone can say he is wrong without being a racist. If we can't get beyond that hurdle, then we are already lost to the dark forces of political correctness so well employed by Stalin to control his people. Wake up. The plutocracy has placed a black man in the office of president for just this purpose of making his actions nearly impossible to attack because of this big stick of political correctness that it pulls out when ever it is needed.

    I fear that Obama, unchecked, will be an economic disaster of a magnitude none of us can fathom. We need debate. We need to recognize that buying everything you want on credit is a short cut to having nothing. This has to stop. And it will stop, either with a failed economy, or a ruined currency, or an uprising of the people, or all the above. Either way it will stop. The choice is yours as to how it stops.

    I prefer revolution as it is quick and gets to the point. The revolution I deem appropriate at this point follows the Constitution as I am sworn to follow as an ex military member. I am not referring to a revolution of guns and bullets, but a more powerful and more promising revolution. The revolution I prefer is simply this.

    Never vote for an incumbent. Fire Them All. One Term Allowed. Even for Presidents. One term allowed for federal, state and local officials. Don't let them stay in office long enough to become corrupt. And if they are corrupt, prosecute vigorously when they are fired from office in the next election cycle.

    This is our best choice. Hire them. Fire them. Break the back of PAC's and special interests. Get new blood, younger blood, older blood, school teachers, doctors, pilots, computer technicians, laborers, and others into the Congress and then fire them too after one term. If one term was good enough for George Washington, it should be good enough for those in elected office today.

    It is only through this method that we can begin to lay the ground work to remove PAC's and the other bad legislation of the past. It is only through a method such as this that simple and effective election finance reform can be created such as only registered voters being allowed to contribute anything of value and if a candidate accepts anything of value from anyone other than a registered voter, he immediately forfeits the election and is banned from running in the future. Special interests and PAC's will be effectively neutered by this. They need to be.

    Start the revolution today. Pass this on. I beg for your support in this important matter. Our very future may very well be at stake.

    Please copy this and pass it on.

    Thank you.

  • Report this Comment On July 07, 2009, at 10:47 PM, 2MoutAL wrote:

    Excellent!!! You have really done your homework.

    Thank you.

  • Report this Comment On July 07, 2009, at 10:49 PM, 2MoutAL wrote:

    LessGovernment, so besides forwarding this and voting out the incumbents, what should we do with our investments?

  • Report this Comment On July 08, 2009, at 12:20 AM, SRVENK wrote:

    History repeats itself. Anyone foolish enough to be fully invested will get hurt. A relatively greater depression is underway....

    Unemployment must be stopped before any other problem will go away.

    Good luck and Best wishes to all.

  • Report this Comment On July 08, 2009, at 1:06 AM, LydiaVorst wrote:

    Thank you Morgan for a great post!

    We've all been living in a House of Mirrors, or as Peter Schiff likes to say: "the US economy is a giant Ponzi scheme".

    and,

    LessGovernment,

    Thank you for your post. It should be read by every American.

    But, I have a small complaint, we don't know who you are. It would be wonderful if you would fill out your Fool profile so that we might know more about you. Are you an economist? Are you a politician? An author?

    You are well-informed and your timeline is clear. You want your message to be passed on, yet it would lend more credibility to that message (although well-expressed) if more was known about you.

  • Report this Comment On July 08, 2009, at 1:46 AM, alanpop wrote:

    Your analysis was generally excellent, and I learned a great deal from it.

    You did, however, make an important historical mistake. You wrote: "If one term was good enough for George Washington,"

    He served TWO terms.

    Your proposed solution, while superficially attractive, has no chance of being implemented.

    Al

  • Report this Comment On July 08, 2009, at 2:01 AM, chicbee wrote:

    This is an interesting article. However the causes are more fundamental than those "identified" by the author Morgan House in the following two paragraphs:

    1. "In short, many "prime" borrowers might just be subprimers with inflated credit scores. This is also true for people who used the proceeds from home equity loans on one property as a down payment for another. The big down payment made the borrowers look financially fit, but it was all an illusion that didn't reflect their true creditworthiness. They were simply moving debt from one inflated house to another."

    2. "In addition, the housing bubble's income distortion also made millions appear more creditworthy than they really were. According to noted economist Mark Zandi, 23% of all new jobs created during the 2003-2006 recovery were housing-related. This includes everyone from mortgage bankers at Citigroup (NYSE: C) to construction workers at KB Home (NYSE: KBH) to (ostensibly) checkers at Home Depot (NYSE: HD). To some degree, the prosperity of all of these jobs was artificially magnified. In a wildly extreme example, Faber's book describes people who went from delivering pizza to working as mortgage brokers making $20,000 a month. (I'd assume they ultimately wound up in the unemployment line). All of this created a stunning short-term illusion of prosperity that allowed armies of borrowers to qualify as "prime" when they were far, far from it."

    Due diligence, or should I say Honest Due Diligence, on the part of the lender would not permit granting any high rating to these borrowers. As of last week, the Hudson City Bank which is good sized, has six (6) defaults in New Jersey. Yes, six, not six thousand. All of these six are due to second mortgages issued by large "Banks." Hudson's President has noted that he realizes a good profit from each of these defaults, because he underwrote, if memory serves me correctly, only a fraction of the current actual value today!!! He and his mortgage writers just did their homework and loaned on value. ALL of the phony reasons for lending to people whose property had much lower values was fraudulent.

    This was ALL the same scam. The scam is turning in phony or inadequate documentation. I have bought and sold lots property over the years. In the last twenty years I had to provide proof of everything. That included two years of Federal tax returns!!! That was true when I bought my current house in Tucson in 2000. The need to prove ability to pay went away in the last few years.

    Phony credit scores are irrelevant. Where was the due diligence on the part of the issuing lender and on the part of the receiving lender?

    There was a lot of fraud because the fees and bonuses for being a conspirator in this large scale conspiracy to commit fraud were so large.

    OK, the "Writers" at mortgage companies of the low documentation mortgages and the bank officers who purchased them were crooks. We can identify further the appraisers who asked "what number are you looking for"?

    Let us not forget the folks at the rating agencies who rated the credit worthiness of these sliced and diced phony "financial instruments" as AAA when it was clear they were intrinsically worthless. If you are lending to those who will not be able to meet the payment in 39 months, then you know there is no one left to buy from them at that time in the future. The rating agencies were paid by the lenders, often big banks., The government encouraged the phony ratings so it could say the Gross Domestic Product was rising, as it actually was falling.

    Stupidity did play a role, but this had nothing to do with stupidity on the part of conspirators I have mentioned. This appears to be grounds for prosecution under the Rico Act. We just need to find an aggressive and relentless prosecutor who can be guaranteed protection for himself and his or her family by the same folks who guard the President. "POTUS is moving" would then mean Prosecutor Of the Undeserving Sleaze-bags is traveling.

    I really am simply pointing out the causes stated in the articles, while interesting, are not the actual root causes, which are the ones I have noted.

  • Report this Comment On July 08, 2009, at 8:07 AM, LessGovernment wrote:

    Actually, alanpop, we are both correct.

    You are counting both of Washington's terms in office and I am referring to the number of terms Washington was elected to office.

    George Washington was appointed to the first term by the Continental Congress. He was only elected once.

    When I stated "If one term was good enough for George Washington, it should be good enough for those in elected office today. " I was refering to the number of elected terms served by George Washington.

    However, I must congratulate you for your historical knowledge.

    I hope this explanation is acceptable. And I certainly hope that someone with your knowledge will get involved with the movement under foot to fire congress.

  • Report this Comment On July 08, 2009, at 9:17 AM, BMFPitt wrote:

    George Washington was elected twice, in 1789 and 1792. Your quote wouldn't have made sense even if he was appointed. Thanks for playing.

  • Report this Comment On July 08, 2009, at 3:03 PM, MyDonkey wrote:

    LessGovernment:

    For a different view on the effect of the CRA of 1977, here's what Matt Taibbi wrote:

    "I’m always amazed at these people who think the Community Reinvestment Act of 1977 caused the Housing and Credit Crisis of… 2007. You’d have to be as dumb as a bag of hammers to think that a law gets passed in 1977, magically does not affect the housing market adversely for 30 years, and then suddenly explodes in toxic leverage and brings down the entire international financial system a generation later.

    For the last time: the Community Reinvestment Act DID NOT FORCE BANKS TO LEND TO UNWORTHY BORROWERS. It did not force banks to open branches in bad neighborhoods or rescue “burned out” communities. It did not actually force banks to do anything at all, as a matter of fact. All the act did was specify that if you wanted to get FDIC insurance, you had to actually lend to the people whose deposits you held. And this was not mandated by quotas or numerical targets. There was no specific mechanism for this at all. The act just forced banks to be subject to periodic reviews by the banks’ primary regulator, whoever that happened to be — the Fed, the OCC, the FDIC, and the state banking institutions. These regulators were supposed to look at the banks’ lending history and make sure that they weren’t refusing to lend to their own depositors, a practice that was common in ghetto bank branches through the seventies.

    Since we have all seen how completely and totally ineffectual the banking regulators have been in the last fifteen years in enforcing even the most basic criminal statutes, it again strains the imagination to conceive of the mind that would believe that somehow all these different ineffectual regulators ignored all other laws for decades but chose to hammer the banks with the CRA, forcing them all to give out loans to poor black people.

    It’s not true and it’s absurd. The CRA, again, did not force anyone to make any kind of loan. I’m going to quote from the Federal Reserve’s own description of the law:

    “Nor does the law require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution’s CRA activities should be undertaken in a safe and sound manner.”

    This crisis had nothing to do with the CRA and everything to do with the collapse of mortgage underwriting standards, coupled with advances in the technology of securitization, which allowed banks to lend to unworthy borrowers and then sell off these dicey mortgages to secondary buyers. The driving forces in this crisis were bonuses for mortgage brokers and appraisers, underwriting fees for the securitizing firms, and commissions for the institutional fixed-income fund managers who bought this stuff from the investment banks. It was a purely market-driven process and had absolutely nothing to do with government-mandated social engineering.

    It blows my mind, the lengths people will go to to blame disasters on liberals and minorities. The really ironic thing is that if you want to blame the Democrats for this stuff, there are plenty of real misdeeds to bash them for. The fact that the Limbaugh/Hannity crowd decided to focus on a basically irrelevant law like the CRA shows that they know their audiences will buy pretty much anything, so long as the punchline is black slobs on welfare breaking the back of hardworking America."

    <end quote>

    and further...

    "I’ve got to add something else, because this is just so ridiculous, this pegging the financial crisis on the CRA.

    First of all, the agencies that conduct CRA examinations have absolutely no enforcement powers. None — zero. Even if you flunk your CRA examination, you cannot be ordered to do anything.

    In fact, the government chose to address this issue in 1989 by making the results of CRA exams public. The idea here is that you’d see a little bit of a deterrent here — in the absence of real enforcement powers, banks might at least be embarrassed into lending to their depositors if the fact that they didn’t lend to minorities was explicitly made public.

    On the other hand, the government didn’t want CRA exams to be such a huge burden. So in 1999, as part of Gramm-Leach-Bliley, they mandated that CRA exams would only take place once every four or five years for all banks that were deemed “Satisfactory” or better in their exams.

    In the period 2002-2008, state member banks evaluated by the Fed scored the following: 15.8% were “outstanding,” 83.7% were “satisfactory,” and only .5% had a “needs to improve” or worse rating.

    So according to Boiler, the housing bubble was caused by half of one percent of all banks being so embarrassed by public disclosure of their CRA rating that they went bonkers and started forking over million-dollar mortgages to every crackhead in sight."

    <end quote>

    ...copied from comments on this article:

    http://trueslant.com/matttaibbi/2009/06/18/the-greatest-non-...

  • Report this Comment On July 08, 2009, at 4:42 PM, TomBooker wrote:

    "A recent op-ed in the Wall Street Journal elaborates on this. Regression analysis compiled by a University of Texas economics professor shows that being underwater is by far the dominant cause of foreclosure."

    I'm getting real tired of this total misdirection. You are mistaking cause for correlation.

    Think about it for 1 stinkin' minute.

    If you have positive equity AND CAN"T MAKE YOUR MORTGAGE PAYMENT, then you have two choices. You can either sell your house or refinance.

    If you have negative equity NEITHER of these choices is available, and the lender forecloses.

    Right now people with negative equity have to sit at home and hope-to-gawd, one of the two incomes doesn't get sick or laid-off.

    Liebowitz and you don't have one tiny piece of evidence to support your thesis that people are walking away in droves. It's a vulgar meme until it is proved to not be an Urban Legend.

    And what is the operational definition of "won't pay, but can"? for the house. If I have two kids going to college and saved $100K, guess what the choice is going to be.

    The kids can come and visit Mom and I in our new rented apartment.

    If hordes of people were "walking away" because of negative equity, then 24% of FLA would be empty, and 31% of CA would be empty.

    The Cause to foreclosure is financial impairment, in which you can't make the payment.

    Liebowitz and you will make a good couple hitting the talk show circuit.

    All the while we have self-confessed icons of Wall Street, and members of the Fed, admitting that cheap money and irresponsible lending for which they were unaccountable in terms of risk, ran the Bubble and created the negative equity in the first place.

    I have no problem with a shared responsibility for the negative equity. But this disingenuous and irresponsible use of stats is just another free pass to the lending parties.

    The fact that the lenders/securitizers get a free pass and taxpayer bonuses doesn't mean they didn't participate.

    Yeah, right. The homeowners are immoral shirkers.

    Next week we can do an analysis of poverty. "Eureka, it is due to a lack of money".

    There is correlation and cause, let's learn the difference.

  • Report this Comment On July 08, 2009, at 5:34 PM, Big50Shooter wrote:

    Great article Morgan (again)

    I just read a Bloomberg report that said housing prices are expected to continue to fall THROUGH the first quarter of 2011... Another little tidbit about housing forclosures:

    The focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth

    rate of 200% for subprime foreclosures. (These percentages are based on the period since the steep ascent in foreclosures began -- the third quarter of 2006 -- during which more than 4.3 million homes went

    into foreclosure.)

    Couple this with continued bad news regarding unemployment figures (projected to continue to slide into 2010) and one could say: "We be ski-rewed"....

  • Report this Comment On July 08, 2009, at 11:55 PM, LessGovernment wrote:

    My Dear BMFPitt.

    You are absolutely correct. I had some incorrect information. He was elected by the electoral college - unanimously - twice - unopposed both times. I stand corrected.

    And to Mydonkey, do you have any original thoughts? Or do you just place your trust in others. If so, you will be wrong more than you are right, and this is no exception because Dear Ol' Matt Taibbi is right, but also dead wrong as well as providing us with a very good example of a well told truth being as good as a lie.

    According to you, Matt stated the following:

    "First of all, the agencies that conduct CRA examinations have absolutely no enforcement powers. None — zero. Even if you flunk your CRA examination, you cannot be ordered to do anything."

    I find those remarks very interesting on several levels. First, no one said anything about the CRA examiner having enforcement power, except for Matt that is. So why would Matt say this? Why even bring it up?

    Secondly, to state that because so few banks failed the CRA exam is some how proof that no pressure was being applied to the banks to make bad loans is a real leap of bad logic. There is no cause and effect relationship in your argument. However, one could argue that because the CRA exam failures were so low, it is very probable that a lot of pressure existed to make less than sound loans, otherwise, why comply? This is logic at work. If you want further proff, I suggest you talk to some of the bankers that were involved.

    And finally, here is what congress wrote into law and the president signed into law on the very subject of Matt's no enforcement "None — zero"

    "The Federal Reserve may not permit a company to form a financial holding company if any of its insured depository institution subsidiaries are not well capitalized and well managed, or did not receive at least a satisfactory rating in their most recent CRA exam. If any insured depository institution or insured depository institution affiliate of a financial holding company received less than a satisfactory rating in its most recent CRA exam, the appropriate Federal banking agency may not approve any additional new activities or acquisitions under the authorities granted under the Act. "

    So you see MrDonkey, your friend Matt is correct. The CRA examiners themselves do not have any enforcement policy. But Matt is also dead wrong that there was no enforcement policy, just as he was also dead wrong that there was no pressure to make bad loans. Enforcement is under the Federal Reserve and its spawn, and they my dear friend have a great deal of power when it comes to banking. They are to banking what the IRS is to paying taxes, only more so.

    Matt must have gotten his degree in spin. He is very good. However, spin only works with ignorance. Truth will crush spin every time. Please consider Matt and his twisted research crushed, and you sir should trust in yourself more and in the work of others less. Too many people have hidden agendas, especially in the area of politics and money.

    As to where to invest now, cash. Get out of the market and get into cash until there is something of real news and not spin. Spin is "green shoots". Spin is some government pin head coming out every month or so and telling us everything is OK, the economy is sound, recovery will begin in the next quarter, the recession is over. Actually, I think the recession is over. The bad news is the depression has started. Just more spin.

    Sit on cash. There are going to be terrific opportunities in about a year. Just wait. You will know when it is the right itme to get back in. All we have done is transfer trillions of dollars of bad investments to the taxayer and in the process leveraged our futures to highter taxes and greater deficits meaning a reduction in discretionary incomes. The real problem we all face together is the reduction of discretionary incomes because reduced discretionary incomes brings about reduced economic activity which causes reduced opportunity for everyone. You can't bring the economy up by taxing incomes more without reducing activity, which actually lowers the amount of taxes collected and increases the deficits. We have too much entitlements and to little means to pay for them so our standard of living is based on how much we can confiscate from the future. As we move into the future, we will have already wrecked the economic opportunities. And that is what is happening. Get in cash. Stay in cash. We will be having Congressional hearings by 2012 as to how much to reduce entitlements like social security and medicare becasue of the deficits. The last depression started in 1928 and did not end until 1943. And in 1943 we had a lot of stuff we could build to put people to work like cars, retail space, subdivisions, roads, interstate highways, commercial real estate, manufacturing plants, etc,. Now we have excess inventory of all the above and no Hitler to fight to tear things up so we can build more. Employment used to be a lagging indicator. No more. Low levels of employment are now the leading indicator telling us that economic activity is going to be less than in the past and stay that way for a long time. Get use to the idea, because that is what assinine government policies of rewarding bad behavior has brought us to.

  • Report this Comment On July 09, 2009, at 2:25 PM, factsandinfo wrote:

    I think the nation's housing market is facing new downward pressure as holders of subprime-mortgage bonds inundate the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.

    "Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy.

    "While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va."

    With high joblessness, it is only normal that subprime-mortgage holder would like to sell their properties since they are not sure of the employment status in the coming months.

    Recently read an article on a similar premise.

    <a href="http://www.housingnewslive.com/is-the-housing-market-recover...

    Check out<a href="http://www.housingnewslive.com/blog.php">http://www....

  • Report this Comment On July 09, 2009, at 3:50 PM, derfberger wrote:

    The article doesn't talk about the "down payment" requirement which should surely mitigate the desire to walk away from a depressed market. If one is required to put 10 to 20% down, I'm going to think about it before I walk away from that house.

    except that many were zero down.

    But to walk away still means needing a place to live and isn't working out an affordable payment plan better than rent?

    I would call the strikes and sit-ins by ACORN pressure on the banks

  • Report this Comment On July 09, 2009, at 7:13 PM, Persuter wrote:

    "If one is required to put 10 to 20% down, I'm going to think about it before I walk away from that house.

    How about marrying that aspect to the article. I'd be very interested in coorelation of down payment requirements with the "tendency" to forgo your responsiblities and just "walk away."."

    You're not underwater if the equity in the house exceeds the liability, so a down payment has nothing to do with anything, except in the obvious sense that a 20% down payment keeps you from being underwater if the house price drops 15%.

    And I have a friend who's about to foreclose on his house. Theoretically he can still make the payments - but he's losing thousands a year as the rent isn't anywhere close to the mortgage payments. He's got a brand-new kid, a new house and a new job in another city. The bank was happy to pay $220K on his house, and it's their bad luck that they're going to be getting it back worth about $160K.

  • Report this Comment On July 10, 2009, at 3:43 PM, buccodog wrote:

    Dam

  • Report this Comment On July 10, 2009, at 3:45 PM, buccodog wrote:

    Sorry about the previous post. But Lessgovernment you are one smart guy. I don't know if you are 100% right, but you maybe, but regardless, you are fricken smart.

  • Report this Comment On July 10, 2009, at 4:43 PM, pbealtx wrote:

    Well, if we're really looking at foreclosure rates for underwater mortgages, let's examine the year-over-year increase/decrease in THOSE filings instead of speculating.

  • Report this Comment On July 10, 2009, at 4:47 PM, pbealtx wrote:

    i still think the least-costly, least-govt-intrusive solution to the problems for those not able to make their payments (due to loss of job, not gambling on adjustable mortgages) as opposed to those unwilling due to being underwater would be to extend the mortgages out to 40 or 50 years. the monthly payments, though covering less equity, would be lower and the lenders would still get their same interest rate.

  • Report this Comment On July 11, 2009, at 4:18 PM, MKArch wrote:

    The stats are taken from the start of the collapse in 2006 so all the flippers and speculators that only purchased the house as an investment and bailed right away are skewing the numbers. The vast majority of people who bought houses to live in them are trying to hang on but as job losses mount so do foreclosures to real home owners. You need to put the numbers in context there was an excessive number of flippers and speculators in this bubble market that bailed right away skewing the negative equity number. I think it is wrong to conclude that negative equity is always the most important factor. It's most important to people who bought the house to flip it and due to the excessive number of these people this time around and the fact that they are the first to go negative equity has the highest default rate since the start. That doesn't mean it's going to continue to be the determining factor going forward.

  • Report this Comment On July 12, 2009, at 5:48 PM, ted678 wrote:

    If all mortgage interest rates were reset to the current rate--none of this refinancing torture--then the loan would be more affordable and foreclosures would drop.

    The lender already is married to the borrower and the old value of the house.

    Lenders are not refinancing because they are riding those with upside down loans who are attempting to stay current and can't refinance.

    www.covestreet.com

  • Report this Comment On July 12, 2009, at 10:18 PM, GaryPernice wrote:

    LessGovernment did a great job outlining historical markers that should have been sufficiently clear and known to Congress. Great job, LessGovernment.

    Gary J. Pernice

    Platinum Business Group, Ltd

  • Report this Comment On July 13, 2009, at 7:38 PM, GetMeTheBigKnife wrote:

    People - you're looking too closely. We're all focused on the "branch" level of problems... like mortgage defaults, unfair bailouts, unfair burdens, etc.

    We must turn our attention to a large factor at the ROOT of the broader problem - namely, Goldman Sachs and its hold on our govt and economy.

    Read: http://www.rollingstone.com/politics/story/28816321/inside_t...

    There are many articles on this topic. Google it.

    New York Post: http://www.nypost.com/seven/07012009/business/goldman_gotcha...

    The Daily Bail: http://dailybail.com/home/does-the-devil-reside-at-85-broad-...

    Motley Fools - where are you??

  • Report this Comment On July 13, 2009, at 7:41 PM, hifibri wrote:

    I'm encouraged to see the discussion of factors that contributed to the current state of the housing market other than the hyperbole and trite "Mortgage bankers lent money to anyone with a central nervous system; homeowners knowingly lied on their mortgage applications; Wall Street gladly bought it all without asking questions." that is the mantra of the media. Most loans were done with complete compliance to the law. When you are talking nationally you need to think big. The biggest forces had nothing to do with mortgage brokers, real estate agents or appraisers - those are the little guys. The FED's monetary policy and de-regulation was the start of all that came afterwards.

    Fundamental economic problems began in the job market in the late 90's with outsourcing, downsizing, and rightsizing (remember those words?). The dot com bubble in 2000 was fun until it popped, then 9/11 created another blow to the economy. The Fed pushed rates too low for too long which started unprecedented appreciation in the housing market. Lending became easy because there was going to be 15% more equity next year. Borrowers descended on the housing like never before because everyone wanted to get rich. Remember you cannot have a market unless you have willing buyers, this simple fact seems to be forgotten in every media piece written. Low rates courtesy of the FED worked great to keep the economy going, until rates started to rise in late 2004. Because inflated values could not be sustained at higher rates appreciation stopped. Then, as expected the riskiest loans defaulted first - sub prime. Sub prime defaults were merely a symptom of problems elsewhere and did not cause the bubble to pop. So here we are with the same problems we had in the late 90's that were masked by low rates.

    Many people are walking away from their houses because they are upside down even if they can pay. Bad loans, bad appraisals, bad real estate agents, they are all convenient excuses. If there was equity in homes they would not go into foreclosure.

    So we all know debt caused this problem but our current Administration feels more debt will help us out of it. Spending what we don’t have to give a man a fish to eat instead of teaching him to fish. Once the stimulus runs out we will starve.

    Because it was brought up, the CRA most definitely contributed to the housing bubble. It did not stay dormant since '77 only to raise its head in the 2000's but its role was expanded under Clinton. Underwriting guidelines were also relaxed many times thereafter. Un-documentable (tax free - hard to believe it was allowed) income from such sources as babysitting and lawn mowing became acceptable. Risky loans for sure but these also created additional demand on top of an already frenzied market creating higher prices.

    Banks were basically extorted into making these loans or risk being sued and all the bad publicity that went with it. In addition, the very same consumer groups that pushed for these loans looked at foreclosure data in the neighborhoods where these loans were made and accused banks of redlining and making ‘predatory’ loans to ethnic neighborhoods Barney Frank, Chairman of the Committee on Financial Services (and others) wants it both ways. He wants to get more people into houses while at the same time making underwriting standards tougher. He does not understand that it does not work both ways.

    He and these consumer groups just don’t realize that instead of lowering the bar so more people can buy a home, borrowers should be ‘prepared’ so they can meet the bar.

    Thanks to many of the other posters. I find the responses very interesting.

  • Report this Comment On July 13, 2009, at 8:16 PM, oldblue64 wrote:

    You forgot the most important part. It was Democrats/ liberals who forced the banks to make these bad loans by putting racial tests on the number of loans made. Not enough blacks getting loans, make more loans to them. What, they have little income and bad credit, make those loans anyway. If you don't you will branded racist and be subject to punitive action by both Congress and the regulatory apparatus. Thank you Bill Clinton and liberals.

  • Report this Comment On July 13, 2009, at 8:57 PM, LessGovernment wrote:

    Two comments.

    First, hifibri, you are right on target. A lot of people want to say that 30 year old CRA legislation did not help to cause the problem. In a way, they are correct. It was however how this 30 year old legislation morphed later as amended by the Republican Party, and how it was interpreted and enforced, especially under Janet Reno and Bill Clinton that it created so much harm to banking.

    Secondly to oldblue64, I wish it were that simple. But alas, Republicans have been just as harmful as Democrats, and in some cases even more so. That is why the GOP is in such disarray. Their constituents left the Party becasue the Party became more like the Democrats thinking that was the way to win elections. They were wrong. If anyone is still fighting the battle that one party is good and the other is bad, that someone is not paying attention. They have, Republicans and Democrats, voted for PAC legislation, have their fingerprints on loose borders, no oversight, sloppy legislation, excess spending, expanding socialist programs, and rewarding bad behavior for votes, etc., etc.

    Here is how I see it.

    A simple review for those that do not understand the basics

    (this should be mandatory reading by all in congress)

    If only people would realize the extent to which the previous years of economic "growth" were paid for by huge amounts of new debt, and then realize the writing of huge amounts of new debt with easy credit is now gone, then maybe we would understand that next week or next month things are not going back to where we were at the end of 2007. That is just not going to happen.

    The easy mortgages that funded the speculative buying of first, second and third homes is not coming back because real estate is no longer going to appreciate. That bubble is gone. Without the speculative buying, demand is gone. Without speculative demand, price appreciation is gone. Without speculative price appreciation, loose lending is gone because the loose lending was based on the false assumption that housing would appreciate forever. It can't. It didn't. Pop goes the bubble.

    The speculative buyers are now having to liquidate properties so the prices are falling. As the prices fall, those with no money down mortgages are seeing that each day they are going deeper into debt so they walk away from the house and the mortgage. This usually results in the house going into foreclosure. Being underwater on the mortgage has got to be the most serious cause of foreclosure becasue it has contained in it an economic incentive to wlk away and shed the excess of debt over value. Obama's new plan to have Fannie and Freddie loan up to 125% of value ignores this basic fact. In otherwords, Obama's new plan is to create underwater mortgages. He is nuts.

    The securities that are based on the collateral of these mortgages that are failing should rightfully lose value, and if mark to market were a reality, the holder of the security would have to write it down now. But that too has changed. Congress has now seen fit to sanction "cooked" books once again, so mark to market is now effectively gone.

    The now foreclosed property will be offered for sale at a huge discount to the current market price due to the stigma of foreclosure which in turn reduces the market value of the properties around the foreclosed property. This feeds the downward spiral of value, which feeds the increasing number of mortgages that are underwater. Just as the sun will rise tomorrow, this will increase foreclosures.

    As to employment, the workers that built houses are now out of work and drawing unemployment. Factories that made appliances and carpeting, paneling and flooring, windows and roofing, wiring and plumbing are all reducing output slowing the economy even more as they shed workers or cut hours worked or both. The copper and aluminum and steel and lumber and other commodities suffer downward price pressures due to the lower demand. This is the effect of a bubble gone bust.

    What enabled this bubble was the inflated rating of the debt instruments created by the pooling of all these questionable mortgages that were created with no money down, lax verification of income, and teaser rates. A teaser rate is simply a mortgage that will cost more in the future. A teaser rate was used to originate the mortgage because the mortgage was not affordable to the borrower with the real risk associated mortgage rate. So a teaser rate was used to originate the mortgage by an originator that did not really care about later because the originator was not going to hold the mortgage.

    Instead, the mortgage was to be sold to a firm on Wall Street (named for a wall used long ago to keep pigs out - appropriate don't you think?) or to Fannie Mae or Freddie Mac. These entities would then pool a bunch of these purchased mortgages together and create a security that was to be backed by these very mortgages. The idea was to sell the security to raise the funds needed to pay for the mortgages purchased from the originators.

    So already, the financial responsibility has been removed from the loan originator for any lax standards employed to originate the loan, and the risk is about to be transferred to the purchaser of the security. Keep in mind where this risk is going. The risk, when the security is sold, does not stay with Fannie and Freddie and Wall Street. The risk of the debt ownership gets transferred to the purchaser of the derrivative security.

    But before the security could be sold, it has to be rated. It was this rating of these derivative securities as investment grade (AAA, AAA-, etc.) that made the Ponzi scheme work for a while. Otherwise pension funds and other investors would not have been allowed to buy the securities derived from such debt because most of these types of funds are limited to buying only investment grade securities. So where was the oversight? Ask congress. Why were rating agencies paid by the very companies that created the securities? Ask Congress. Why was this not reviewed by another agency? Ask congress. The answer to all of this is simply that is the way Congress wanted things to be done.

    This was the point of critical failure. If not for the high rating, these securities could not have been sold. If they could not have been sold, then the mortgages once originated, would not have had a market, Wall Street and Fannie and Freddie would have stopped buying, and the origination of these time bomb mortgages would have stopped. But there was no oversight, the ratings lie continued, and they origination of these loans was not stopped until the market imploded, but that was far too late.

    This was Enron all over again. With Enron, you had accountants paid high fees to look the other way as receivables, from over 8,000 fictitious companies, were added to the books, inflating sales and profits and accounts receivable. Credit sales and debit accounts receivable and presto, you have increased earnings. This is what audits are suppose to catch. But high audit fees seemingly got in the way. Government investigators claimed at the time of Enron that this was very complex and extremely difficult to understand. Yeah right. Auditing 101 - Test the Accounts Receivable.

    What followed next with Enron was even more astonishing as Arthur Anderson had a week long shredding party of all their work papers relating to Enron. The big question still in my mind is why were they allowed to shred their audit work papers? The Justice Department and the Police were called and advised this was happening, but the shredding party continued. The shredding party even continued while management from Enron sat in front of and delivered testimony to Congressional committees. Imagine. Sitting in front of a Congressional committee testifying about what happened as to the Enron failure and knowing that while you sat there, your minions were shredding all the audit work papers. What nerve.

    Could there have been an association with a high white house source that prevented the stopping of the shredding? Like say the president that was very close to the Enron top management? We will probably never know. By the way, Enron was a few billion, like ten or eleven. Chump change, but a good dry run for what was to follow.

    Okay, back to the bad mortgage origination. The rating agencies poor performance, coupled with poor oversight by the SEC (isn't that their job?) and Barnie Frank and company ((wasn't his committee supposed to provide oversight of Fannie Mae and Freddie Mac?)enabled the Ponzi scheme that pushed a few trillion dollars of toxic securities onto the unsuspecting markets. This lack of oversight and blind eyes (too much campaign contributions form Fannie and Freddie?) allowed a housing bubble to not only exist, but to thrive.

    Now we were looking at Trillions of dollars in lost investments and government bailouts of the guilty. Not 10 or eleven billion as in the case of Enron, but Trillions of dollars. And the risk? Remember where the risk had been pushed? The risk had been pushed to the purchasers of these derivative securities.

    One very large purchaser was China. China did not mince words with Secretary Paulsen (who had a great relationship with China from his days at Goldman Sachs). China was very clear. You stick us with this loss and international banking as you know it is over. This was now a crisis. The Treasury reacted by doing something it had never done before. It guaranteed the debts of the two GSE's (Government Sponsored Enterprises) Fannie Mae and Freddie Mac. This was very interesting because by act of Congress, these two GSE's were not backed by the government. However, when China called Paulsen, this simply had to change.

    So the Treasury stepped in and bailed out Fannie and Freddie and some of the larger Wall Street (anti pig wall ) crowd effectively transferring all the risk they could sop up because of these derivatives from the securities holder to the taxpayer. If you think this is as bad as it can get, then you haven't been paying attention.

    But first, you must understand that the problems with Enron were balance sheet problems where Accounts Receivables were intentionally overstated. The problems with Fannie and Freddie were also balance sheet problems where the assets were overstated and everyone knew it. In short, Fannie and Freddie paid too much for the low grade mortgages they bought and lost money on the buy side. They were toast no matter what they did on the selling of the derivatives. So their balance sheet will have to go through many adjustments as they adjust the balance sheet to more correctly reflect the true value of the mortgages they bought. As to the securities they sold, they were liabilities. They were accurately stated. The problem at Fannie and Freddie was simply that the liabilities exceeded by a very large amount the real value of the assets (mortgages) held. That in a nutshell was their problem.

    However, all of this Enron, and Fannie Mae, and Freddie Mac, and even the Federal Reserve and the shenanigans at the Treasury pale to insignificance when compared to the father of off balance sheet accounting.

    I am talking about Congress and how we keep books at the Federal government. Congress, using a bad method of accounting (cash funds vs. accrual accounting) and the resulting spending policies has created an off balance sheet obligation (debt) of about $80 trillion. So I say Congress wins as the dumbest funds manager or as the biggest liar. You take your pick. Heck, I'll award them both titles.

    At this point I hold them all in utter contempt for what they have done to the economy at present and what they have done to future citizens that did not even have the opportunity to not vote for them. Yes, we are currently having a problem in the capital markets brought on by bad behavior in the capital markets themselves that was aided by the rating agencies that were paid by the capital market players to knowingly rate the risk on derivatives too low, and the quality and hence value of the derivative debt too high.

    But consider for a moment the other enablers. The Fed's special discount window is an investors black hole so investors can not even see if their bank is one of the banks that has gotten into trouble and is having to use the new special Fed window to borrow enough money to stay ahead of a run on the bank. You would think this sort of information should be made public. But no. That is none of your business. The government (Congress) will take your money and stick you with the bill, but you can't even see where the money is going. That is by design and it gets still worse.

    The Fed that orchestrated this black hole of money being loaned to struggling banks now wants control of the Securities and Exchange Commission. One of the main purposes of having the SEC is to have Fair and Open markets. Open means that investors can see what is going on. The Fed obviously does not believe in openness and yet wants control of the SEC. What utter audacity. And what danger to concentrate even more power into this agency.

    We need to return to a mindset that in a capitalist system businesses thrive and businesses fail. And when failure occurs, government has no responsibility to do anything. Imagine just how good the economy could be if government did not feel responsible to bail out bad behavior? This is true for businesses and individuals alike. Imagine how much more economic activity there would be if 15.3% of your paycheck was not siphoned off to fund Medicare and social security? These programs are simply a substitution for discretionary income. How many of the people that are relying on Medicare and Social Security are in that predicament because they chose to not get an education, or they chose other lifestyles that basically prevented them from saving for themselves.

    In response, here comes members of Congress saying don't worry, I'll bail you out if you will just vote for me. Vote for me and I'll give you whatever you want. So out the window goes personal responsibility and the attached necessity to work and save for one's own future. Instead, we create incentive after incentive to not work replacing responsibility with welfare and creating multi-generational welfare families.

    And to pay for this great act of caring, the economy is hit in this case alone with a 15.3% payroll tax that takes the money out of your pay. But the government did not stop there. They still charge you income tax on these funds as though you actually received it.

    And it does not stop with individual responsibility and lack thereof. Now, Congress, and the Treasury, and the Fed are all working together to bail out businesses that acted irresponsibly and give you know who the bill.

    We certainly don’t need the head of the Federal Reserve being allowed to spend hundreds billions of dollars without Congressional approval. There have to be limits even on the Federal Reserve. Just as expanding this entity’s powers now is exactly the wrong thing to do given the Fed's actions of late as to transparency.

    And what about the new president. Mr. transparency himself. Well, Obama talks a good game, even about transparency in government. But look at the Federal Reserve and the lack of transparency and the man running the Federal Reserve is working for the president. This lack of transparency could be fixed tomorrow morning before the coffee got cold. Just call Bernacke up and say open your books or clean out your desk. But once again, the new president says one thing and then does something else. This is Change Obama style.

    A better question we should be asking is do we even need the Federal Reserve? I think not. We don't need it based on its track record. All it has done in the recent past is cause bubbles and busts as it has been constantly blind sided by the future as it over reacted to the symptoms of the past. It is even now blind to the inflation that is coming due to the recent policies of the Fed employed to correct the investment madness that was driven by the Fed's cheap money for far too long that was employed to correct the stock bubble bust in 2000, and so on. Their track record is bad. Very bad. And we also don't need the Federal Reserve because it is not even constitutional. So with a bad track record, a lack of transparency, and a constitutional issue, why is it that we need the Fed?

    Instead of expanding the role of the Fed, I think we need hearings on how to dismantle the Fed once and for all. Even its mission is a contradiction. The Federal Reserve has been tasked to keep inflation low, and provide for a vigorous economy. Capping inflation is easy. Raise interest rates. Vigorous economy is easy, lower interest rates. Try doing both. I guess their job is sort of like sticking your head in an oven and your feet in a freezer. On average, you should be comfortable. But on the edges, you are anything but.

    To put a few wealthy men in the un-elected position of subjectively controlling the economy is more royalty than appointed office. If you want to control interest rates, let the market do it. Instead, we constantly have the Fed influencing market rates, rather than the market influencing the rates at the Fed. Again, this is nuts.

    So don't listen to the talk about why we should fire Bernake. Fire the Fed instead. And when you do, let the Fed eat the Trillions of dollars on their books that is there helping to cook the books of the Treasury (more lack of transparency). And please don't even think about firing a single congressman. Fire them all. Never Vote for an incumbent.

    What really aggravates me is no one is discussing seriously the real problem and here it is.

    We have systematically destroyed discretionary incomes and replaced it with higher deficits used to fund programs that are designed to replace what discretionary income once provided. No one seems to understand this. And in the process of doing this, we are destroying the future's chances, hopes and opportunities.

    We are, in reality, basing our current standard of living on what we can confiscate from the future.

    And I for one am sick of it.

    Every member of Congress understands this. Yet every member of Congress thinks their snout in the trough of Washington inside the beltway is somehow worth the sacrifice of someone else's money.

    To that I say, Fire Them All.

    One Term Allowed.

    Never vote for an Incumbent.

  • Report this Comment On July 13, 2009, at 10:31 PM, hifibri wrote:

    LessGovernment, Agreed, the FED is more of a banking cartel than anything. The book “The Creature from Jekyll Island” will tell you all about it. Look at a definition of the FED and it will state it has public and private functions. Private when it is making money, public when it needs bailout money. Most people don't even realize the hidden bailout they are getting. In 2003 when banks could borrow at 2%, mortgage rates were around 5%. Currently, and for a while now, banks have been borrowing at .25% - 0% yet rates are no lower than they were in 2003. Of course they are miraculously showing profits, their cost of goods is zero!

    The problem with rating agencies was that they were looking into the past to determine ratings of subprime. As the bubble progressed low rates fueled appreciation which masked typical subprime delinquencies. Because as long as there was equity the house could be sold or refinanced. No one, not even a subprime borrower lets a house go if there is equity in it. Because of this, looking at the performance of subprime loans - the past - rating agencies saw nothing but near perfection and rated them accordingly, rather than looking at the fundamentals of the loans. The investors were so hungry for these higher yielding investments (vs. conforming aka Fannie/Freddie loans) that they lowered their standards for what they would buy. They determined the underwriting criteria they wanted. If they were being outbid on loans with 620 fico scores they would buy 600 fico score loans. If it was 90% LTV loans they would buy 95%, then 100%. (There was a time in the late 90's when 125% loan to value mortgages were common so these were not all that unusual.), but there was an insatiable appetite for these loans.

    Mortgage Originators were not passing the risk to someone else; investors were telling originators what type of loans they would buy. Originators do not make up guidelines. If the originators were to share the risk they must also share the reward of these loans, but originators only originate loans that meet the guidelines they are given.

    It's too bad these guys in Washington don't study anything closely enough to really realize how any legislation will affect an industry. Case in point, I don't understand how this guy is still in office...

    http://www.youtube.com/watch?v=LPSDnGMzIdo

  • Report this Comment On July 13, 2009, at 11:17 PM, thisislabor wrote:

    there was reason why a 20% down payment has been the historical gold standard down payment....

    it keeps people from walking.

  • Report this Comment On July 13, 2009, at 11:31 PM, thisislabor wrote:

    sorry lessgovernment

    your really intelligent and I can see where you would think the stuff you think, and I see your legal references.... but I don't understand how you can miss the fact that banks were paid their salaries based on how readily they could get borrowers to get a loan. hence the drop in lending standards. they held onto none of the risk and only made their cash on repackaging and servicing their loans.

    if the government would have made a duel standard loan, 0% for loans to business and 7% to home owners at the 9/11 event and carried it forward, we would have been great. at 7% money it is worth your time to come up with a downpayment anyways to get out of paying so much interest on your "loan-to-death" (mortgage).

  • Report this Comment On July 14, 2009, at 2:17 AM, LessGovernment wrote:

    I am not trying to say and never have said that the CRA caused the crash. I don't know why MrDonkey seized on that one aspect. I am only saying it was indicative of the history of bad legislation and part of the dismantling of the safeguards that allowed other events to happen. And yes it did lead to banks making loans they would not otherwise have made. But did this alone cause the crash? NO. It was just a piece among many.

    So was the legislation that brought us PAC's. PAC's gave money in exchange for votes that basically bought the system. Banking got the legislation they wanted thanks to PAC's.

    The Commodities Modernization Act, another piece of the puzzle, took away any requirement to have funds at risk especially with CDO's and removed oversight for over the counter derivatives. This was bad legislation that also allowed other aspects that are listed above by others as "causes" of the meltdown to be able to flourish.

    Try having unregulated derivatives trading by federally insured institutions and Glass Steagle at the same time. You can't. That is my point.

    I never said these less than stellar Congressional actions caused the meltdown. I said they set the stage for an economic event, not caused it.

    But try orchestrating a crash like we had without the history of the bad legislation that removed the safeguards. That does not work either. It all worked together. But the removal of the safeguards was the key to enabling it all in my opinion. Otherwise we would have had a bub instead of a bubble. It would not have gone on for so long and grown to such immense size.

    So with the safeguards removed, and with little risk in the game at many levels, and with the Fed puking out cheap dollars for too long to the banks, yes a bubble was created. Why not. No one had any real risk so long as the risk could be transferred to someone else. And the final enabler was the unregulated CDO (thanks to the Commodity Modernization Act) where institutions thought they were hedging their risk with a firm that sold what amounted to unregulated risk insurance with no collateral backing up the promise to pay the losses if they occurred. No risk there either. Is it any wonder we had such a huge meltdown? No.

    My question is have we learned anything?

    We still rate securities the same way by the same entities. What was learned?.

    We should have ratings agencies that work like accounting firms and audit the issuance of the derivative and express and opinion as to value and assume some percentage of the risk for the opinion and carry professional liability insurance just like accounting firms do. And even then, they should be reviewed by the SEC or some other agency just to keep everyone honest. Or, we can continue like this is the wild west and do it all over again.

    I even think it is time to scrap the aaa, aaa- approach and go with something more meaningful like a rating of (95-99) where the first number is the audited opinion of the seller's ability to retire the debt on time, and the second number the likelihood of the debt ultimately being retired in full with interest even if it is paid late. Maybe someone else can come up with a better rating system. AAA vs AAA- is a wee bit vague to me as to the difference and if the rating is vague, then what of the rating process itself. No liability currently, just an opinion, still paid for by the firm creating the security. What have we learned? Nothing.

    As for the personal comments, I won't go there. It is not a good form of debate. If you disagree with an idea, debate the idea. To bring in personal insults is just debasing the forum and yourself.

  • Report this Comment On July 14, 2009, at 2:59 AM, LessGovernment wrote:

    Sorry thisislabor, but I am not buying it.

    "but I don't understand how you can miss the fact that banks were paid their salaries based on how readily they could get borrowers to get a loan. hence the drop in lending standards. they held onto none of the risk and only made their cash on repackaging and servicing their loans."

    I did not miss this. I am only confused by what you mean as "banks"..

    If you mean loan originators that were working to fill the demand from other investors that is one thing. If you mean full service banks that used their own funds to originate a mortgage and then sell it, then a bank is something else. And banks are not paid salaries, employees are paid salaries.

    So if you are saying that employees of full service banks and loan originators got paid based on how readily they could get borrowers to get a loan, well ok, but what does the internal compensation structure of the bank or loan originator have to do with anything?

    The issue was and is that the loan origination started a chain of events where risk was transferred from one to another and only rarely was any risk retained. This lack of risk retainage is at the root of the problem because it removes accountability should something go sour, like a mortgage going into default. And without accountability, what was the goal of the originator? Fill the investor demand and don't look back. There is nothing in this model to encourage the originator to do anything else. There is no incentive to make sure the loan is being made with sound practices. In fact, sound practices got in the way of filling the investor demand.

    I think we agree on more than you know.

  • Report this Comment On July 14, 2009, at 10:55 AM, hifibri wrote:

    Thisislabor, you are correct about rates, which is exactly what has been said here, rates were too low for too long. In your example at 7% interest, a larger down payment saves a borrower not only because the loan amount is smaller but primarily because it does not require PMI which insures the lender against default because statistically the default rate is higher with higher loan to values.

    To state banks were pushing loans on people is a misnomer fostered by the media and people upside down on their mortgages looking for a reason why they were victims. Personal responsibility is something as rare as the Dodo bird these days. It is never one's own fault when something bad happens to them. This is a by product of our litigious sue happy society.

    I’m not sticking up for banks because I resent paying taxes to bail them out for their mistakes, but I was alive during the boom and saw it happen. When the average person buys a new car, they can tell you every detail about the vehicle, horse power, fuel economy, power mirrors, carpets, Mica sunset sand beige, etc., but when it comes to the biggest purchase of their lives they are helpless?!?

    Borrowers were piling into banks in droves because rates were so low. Banks were not using hooks to pull people in off the streets and shoving pens into their hands. The demand was there. It was buyers and home owners refinancing for low rates and cheap cash out. Buying a house takes an awful lot of pre-meditation. Think about the process. Buyers must think about the advantages of owning a home and decide to do it before they take action. Then they must decide on the area they want to live in, then look at many houses before putting an offer in. Once the offer is accepted he must get financing. The financing piece comes in nearly at the end of the process. Many people at that time, used to living on credit, only wanted only the lowest payment they could get. Investors were hungry for loans and allowed higher debt to income ratios above traditional levels. This was bad because it did not leave room for higher payments on the mortgage or credt card debt should rates rise or consumers debt increase. But borrowers did not care about the long term. Another problem with Consumer groups was that they beat into people heads to shop for the "best" mortgage. Well the average person does not necessarily know what 'best' means. To many this means the lowest payment, which is what they got, even though the loan was all wrong. There were people who specifically wanted the lowest payment because they had no intention of keeping the house for 30 years. It was just going to be a quick 12 months to refinance or sell to make $40,000 and move up to the next house or just cash out. I know of one man who liquidated his retirement savings to buy a huge home for him and his wife to live in, exclaiming this was his retirement investment that was going to make him rich. He is probably still working and had to take a second job just to pay the taxes and heat the thing. Point is a lot of consumers did a lot of stupid things. You could not turn on the radio, TV, open a magazine or look at a newspaper without hearing about the housing bubble. The real estate bubble was no surprise. It was a household word in 2002! Still people ran into the market, fought for, and had bidding wars over overpriced houses. This is not something that was a secret, it was known everywhere, yet it’s never the buyers fault. It must have been someone else’s. It’s like blaming alcoholism on liquor stores, makes sense, right?

  • Report this Comment On July 14, 2009, at 6:31 PM, esefes wrote:

    BULL. The term "sub-prime" or 'prime" describe the relationship THE INTEREST RATE on the mortgage has with the prime rate the bank charges and NOTHING WHATSOEVER TO DO with the credit worthiness of the borrower. The representation that sub-prime is somehow reflection of a borrower credit score is BUNK. Sub means below....so the article is saying those with lousy credit get a rate below prime? Nope. For the simple that require a one word explanation of the meltdown TRY LEVERAGE.

  • Report this Comment On July 14, 2009, at 6:43 PM, TMFHousel wrote:

    esefes,

    "The term "sub-prime" or 'prime" describe the relationship THE INTEREST RATE on the mortgage has with the prime rate the bank charges and NOTHING WHATSOEVER TO DO with the credit worthiness of the borrower."

    Well, it's the credit worthiness that determines the interest rate, all else equal. More risk equals a higher rate.

    "The representation that sub-prime is somehow reflection of a borrower credit score is BUNK."

    No, it's not. I don't know what else to say.

    "Sub means below....so the article is saying those with lousy credit get a rate below prime?"

    No. I never said they have interest rates below prime. What's "sub" is their credit worthiness, which leads to higher rates.

    Thanks for stopping by,

    Morgan

  • Report this Comment On July 14, 2009, at 7:48 PM, esefes wrote:

    Have it your way. Of course lets ignore "Teaser Rate", where a borrower with a great credit score would choose a mortgage with an interest rate below prime rate for a few years, or sub-prime, in order to save on interest payments. Those type loans don't exist,right. What happens to your "credit score dtermines interest rate" theory? Lets also ignore the securitization of MBS, leveraged at 30,40,50 to one, with a CDS contract,or multiple CDS contracts against it. How far does the underlying security have to fall, levered at even 30 to one, before the thing goes bang??

    my pleasure

  • Report this Comment On July 17, 2009, at 12:52 AM, bmialone wrote:

    The bottom line is people can't make their payments and others are walking away rather than lose money an uncertain economic future makes them afraid to risk because they've been victimized by the unbridled greed of others. Plenty of us and consumer protection groups have been screaming about this train wreck coming for years, but our leaders, happy investors, and the masses refused to listen.

    Greedy lenders leading people into mortgages they could not afford (hey people, lenders lead the process and ask for the verification, not the borrower); the Entire insurance industry behaving like ruthless shakedown artists; an out of control medical insurance system that has driven us over the edge, and predatory, thieving credit card pay day loan companies getting away with everything under the sun as they drive an entire nation, and especially the younger generation, into indentured servitude with no end in sight.

    Then when trouble hits, lenders and credit card companies Really go for the consumers' throats. No compromises at all, and one single mistake or late payment and the consumer is driven even further into the hole. Then all other companies rifling through his or her records see the problem and raise all of Their rates and prices! Our grandparents and our parents (when they were younger) were not subjected to these financial assaults and atrocities.

    I know from personal experience when several years ago we experienced job loss and sudden emergency expenses for one of our children. Our mortgage lender (GMAC) refused to adjust one single thing and if we were even late with a payment, we would be hit Hard. At the same time, GMAC almost doubled another small loan's monthly payment and so did MBNA on our credit cards. We had perfect credit records and were responsible customers, but we were basically told to go **** ourselves and everyone we owned money too not only refused to work something out with us to get us through the crisis, but they doubled our payments when we didn't even have an income! Oh, and we had to pay for our family's medical insurance with those credit cards because it cost $700 a month with COBRA.

    We squeaked through and recovered (although the stress was hard on our health and the family, leaving us somewhat traumatized and fearful), but I learned how it worked for all those who Couldn't squeak through. They were ruined before they could rally.

    So we can blame Fannie or Freddie, or people we think were stupid so they must deserve what they got, but the truth is our government officials gave us away to private sector Savage Capitalism and now the blood has hit the fan. And they are still doing so by giving the credit card companies until 2010 to bankrupt as many people as possible with their grotesque "policies" and by refusing to send the medical insurance industry packing-instead, they are going to force us to be their customers just as they did with auto insurance. (Gee, see how that kept those insurance companies honest?)

    As for people walking away from homes because they owe more than they are worth? I do not blame them one bit. The lenders, real estate agents, and real estate appraisers have been part of the con that created this bubble because they were making money off of it. They were the ones who understood the market and the system, not buyers. Residential home buyers merely do what they are told to qualify and get a house. I know it is no coincidence that my three homes were Always appraised within $1000.00 of my offer, and that includes the last one that turned out to be worth $15,000 less than I paid. Still, the appraisal came in almost to the penny of my offer! Hmmm... I'm lucky to be in a slowed down but more stable market so my home isn't worth less than I paid, but it is no thanks to the real estate professionals running the show.

    So let people walk away rather than lose what little they have left when they are facing uncertain futures, and force the real estate lending, selling, and appraising professions to change how they do business so home buying is reasonable and humane again.

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