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Senior Advisor

It makes me wonder

 How our economy would have progressed over the last couple of decades without fed intervention and artificially low interest rates. Would the housing boom got out of control with higher rates? Less people buying homes and less inflated home prices.

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14 Replies
Honored Advisor

Re: It makes me wonder

I think that perhaps if the interest rates had been low enough, but the mortgage standards had not also been lowered, we might have been okay, or we'd have been at least way better off. 

When bankers stopped verifying income, for example, we were on a very steep and slippery slope.  Once appraisers got into the game of faking it - when they were supposed to be safeguards against falsely-escalated values - it was pretty much done for...and then everyone had those "creative" mortgages with all the alphabets in their names. 

If you cannot afford a home with its mortgage on a 30-year term, in light of having your income verified, you simply cannot afford that home.  Someone made a slug of money on the losses many investors took.  I'd like to know where it all went....

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Senior Advisor

Re: It makes me wonder

The lenders where the one's that hired the appraisal teams one way or the other---all of this capital tied up in a 30year note that produces nothing except real estate taxes and municipal bonds that metro areas will struggle to pay back---  kinda like when GM went under all anyone could talk about was labor being the culprit ---who" signed the contract"--management in there house of glass that was working on low interest rates already---and borrowing from the employee pension funds leaving the retirement  kitty with huge shortfalls---looking at the big picture for the long haul---CHEAP equates into JUNK most of the time ?

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Advisor

Re: It makes me sad...

...that so many people gave up their financial freedom and future, for a box basically made mostly out of sawdust and glue, sided with plastic, and often finished indoors with contaminated Chinese drywall.  Once in a while, I think how nice it would be to have a modern home with an easier floorplan to make a 21st century life in....

...then, I realize how this little place has survived for well over a hundred years, at least forty of them without anyone in it or maintaining it at all, from what we could tell when we started working on it.  It was set on the highest ground on a very low tract, and oriented to take advantage of the prevailing winds for ventilation.  I've seen whole sibdivisions of "dream homes" built on nightmare sites during drought years, only to be swamped with failing septic systems when the rains returned. 

A lot of the outlying housing developments in some urban areas will become quite marginal if gasoline continues to climb in price.  It will be increasingly expensive to live some places, and prices of homes there will not rebound, even if and when the overall market starts to recover. 

 

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Frequent Contributor

Re: It makes me wonder

The whole thing was perpetrated by the real estate and banking professions to generate obscene profits for themselves.  It started when we got away from people having to put up 25-30% of their own money to purchase a home, car, etc.  Saving up for a major purchase has became a thing of the past.  Instant gratification became norm.  Easy credit from banks, Freddie, Fannie, etc. fueled the fire.  Low interest rates by the Fed provided the finishing touch. 

 

During all of this it was obvious to anyone with an elementary understanding of economics and finance that we were headed for a disaster.  The powers to be knew it too but greed and the desire for power prevented them from putting an end to it.                

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Senior Contributor

Ever remember de-regulation, credit defaut swaps, AIG, etc.??

It is amazing that nobody mentions the root causes of the economic conditions that created the housing boom to begin with. 

 

De-regulation, begun in the Reagan years and endorsed by every President since then began the process that allowed non-banks(investment houses, insurance companies) to merge with banks and yet were not required to submit to intense scrutiny like banks.

 

Credit default swaps, or derivatives, created and lobbied for by investment houses and passed by Congress legalized betting with other people's money, which is what they actually are.  The legislation did not include a requirment that the house that accepted the bets had to keep a percentage of the funds in a reserve, in case the bet went south and the institution holding the mortgages defaulted on its obligations.  Mortgage insurer, AIG held over 791 billion of these instruments and had zero dollars in reserve.  When defaults began, only a small percentage of this huge amount had to go into default to create a liability that AIG could not even hope to pay out.

 

Sub-prime mortgages, the instruments that investment banks used to entice people into purchasing and never disclosing the true cost of these loans as the rates inverted into higher rates.  Investment houses also sold these packaged mortgages to investors, revealing that in time, the rates would go up dramatically and make them rich beyond their wildest dreams.  Surely there was someone with a sane mind that could have figured out this was a house of cards waiting for a sucker to come along and eventually lose it all.  Anyway, these mortgages, sold to investors, also were the basis of securities upon which the derivatives were used to offset the risk of default.  Even so, investment houses continued to sell these, being paid up front and taking in billions in profits and bonuses.

 

Let's not put the blame on any one sector of the business community, they all shoulder part of the blame.  Even local banks got in on the action, though they did not put their money into derivatives.  Our banks quit writing fixed rate loans and were calling older loans and converting them into variable rate loans.  They knew that sub prime mortgages rates would even float their boats as well, without having to invest in them as they understood that the market price of money would rise dramatically.

 

 

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Senior Advisor

Re: Ever remember de-regulation, credit defaut swaps, AIG, etc.??

When ever one encounters financial vudue of any type the shoulder of responsibility is placed on the little man tax payer--does anyone really think any of the top crust at Lehman left with their pockets empty---Reagonomics was the start of the" fouls gold" economy wall street  house of cards---how does "trickle down" work--guess where experiencing it now ?

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Senior Advisor

Re: Ever remember de-regulation, credit defaut swaps, AIG, etc.??

From bottom to top Smokey. The builders, the realtors, the loan originators, the appraisers, the banksters, the ratings firms and the poor saps at both ends. The borrowers and the investors that bought the bundled securities.

 

Everyone all through the chain were shopping for positive answers.  The builders and realators wanted to sell homes. The loan arrangers put together the buyers applications for the loans. Many of them fraudulaent. But hey, the banks have clean hands as the arrangers sent them what they wanted, borrowers and they were to fussy about those because they were going to bundle theand sell them.to unsuspecting investors.

 

But I am getting a head of my self. We haven't mentioned all the fees involved. Appraiser fees, inspection fees, title search fees, Mortgage insurance fees etc etc. Buyers realtors are shopping for the services from those that will paint a favorable/fraudlent picture of the homes value and the buyers ability to repay.  Bankers bundled the loans and shopped for a ratibgs company that will give a positive rating for the bundles. In all these cases, those providing the service were hostage to those buying the service. If the appraisers or the rating company gve them bad numbers they would lose the business to alternative firms. So every one was gaming the system to earn as much as they could in the process selling a bill of goods to hiome buyers and investors.

 

It just stinks from top to bottom and nobody is being indicted. Not yet.

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Senior Advisor

Re: Ever remember de-regulation, credit defaut swaps, AIG, etc.??

Just try to get an honest mort. now and see how long it takes ?  Kraft-t what is industrial fat ??? Wonder if has the trickle down effect ?

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Senior Advisor

Re: Ever remember de-regulation, credit defaut swaps, AIG, etc.??

Just try to get an honest mort. now and see how long it takes ?  Kraft-t what is industrial fat ??? Wonder if it is part of the trickle down economics ?

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