"Look, itâs perfectly possible to explain the situtation clearly and concisely: * starting in 1977, weâve increasingly forced banks to make more risky mortgages by government fiat[1] * in order to reduce the risk, mortgage backed securities were invented * in order to pass risk from more risk-averse firms to less risk averse firms, credit default swaps were invented. * the quasi-governmental agencies that bought mortgages and pushed these mortgage backed securities, full of political cronies[2] and spending big on lobbying[3] , were in obvious danger; there were extensive calls for greater regulation and better oversight, starting in at least 2001[4] * the danger was pooh-poohed, largely by people who were receiving big contributions from the lobbyists.[5] * when the quasi-governmental agencies that has financed and securities the mortgages collapsed, many people who had trusted that the government sponsorship of these agencies made then extremely safe, found they had lost a lot of money. * when they then decided to get out of the risky securities, even at a loss, mark to market caused everyone else to mark their securities down too â which caused them to lose value, which those people to sell as well, in a vicious cycle * which caused the credit rating agencies to down rate a lot of firms, which then triggered the credit-default swaps * and firms which had sold credit default swaps found themselves with demands that they pay cash for this suddenly illiquid security * which caused the illiquidity crisis The illiquidity crisis and the general panic in the markets for mortgage backed securities and associated credit default swaps made it very difficult to evaluate who might and who might not fail: * with no reassurance that they could be paid back, people stopped issuing loans in the commercial credit and interbank market. * which, if it continues, could at any pretty much any time cause payrolls to fail and retail business to be severely hurt (like âno bread on the shelvesâ hurt.) . http://explorations.chasrmartin.com/2008/09/30/concise-explanation-with-blame-assigned/
NYT 1999: Fannie Mae Eases Credit To Aid Mortgage Lending The New York Times | 1999 | By STEVEN A. HOLMES In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring. Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits. In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans. ''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.'' Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market. In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's. ''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'' ... http://www.freerepublic.com/focus/f-news/2086781/posts
Extending credit to poor people didn't sink the ship. It was the high ratio of debt taken by investment banks due to misguided deregulation and cheap credit.
regardless of what the cause, what is the possibility of most of this being engineered? what could one gain from the current crisis? how about one reason being a good excuse (specially to convince countries that bought US treasuries) to create inflation?
FactCheck.org did a segment on this...sorry if it's not as partisan as some like. http://www.factcheck.org/elections-2008/who_caused_the_economic_crisis.html Their conclusions: The Real Deal So who is to blame? There's plenty of blame to go around, and it doesn't fasten only on one party or even mainly on what Washington did or didn't do. As The Economist magazine noted recently, the problem is one of "layered irresponsibility ... with hard-working homeowners and billionaire villains each playing a role." Here's a partial list of those alleged to be at fault: * The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap. * Home buyers, who took advantage of easy credit to bid up the prices of homes excessively. * Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses. * Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes. * The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families. * Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates. * Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages. * Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral. * The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market. * An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic. * Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up. The U.S. economy is enormously complicated. Screwing it up takes a great deal of cooperation. Claiming that a single piece of legislation was responsible for (or could have averted) the crisis is just political grandstanding. We have no advice to offer on how best to solve the financial crisis. But these sorts of partisan caricatures can only make the task more difficult.
How about megarich forward thinkers liquidating ahead of an Obama victory. P.S. I'm voting for McCain.
Hmmm, How about the retards that sat there and said, "Sure, I'll pay an interest only mortgage for 2 years on my $450K house even though I'm a temp worker plumber with my local 277.... and Yes, you can expect that balloon payment in 24 months. See ya then !!!" C'mon.
The point was that Real Estate markets were in the bull phase. So even the small joe' took a $400K house mortgage hoping for some good appreciation to insulate from mortgage payments. Once the trap door of low interest rates on mortgage for first couple or years was shut. The Joe' had not exit plan. The foreclosures were top/easy way out which further accelerated the housing prices downfall. Banks were stuck with the bad loans and structures of brick and mortars with no buyers available. While average Joe' did make a mistake of thinking Real Estate Bull is forever........what about the Ivy League and Wall Street hardened Analysts and Portfolio Managers? They forgot the first rule of investing that 'EVERY ASSET CLASS HAS ITS OWN BULL BEAR & SIDEWAYS CYCLE' Sooner or later Housing was going catch the downturn.......it is just a natural law. But it seems greed got the better of even the best minds and CEO's options based on stock prices were incentives strong enough to throw everything at making as many bad loans as possible. Who will suffer? General populations. Few years ago an article mentioned that even in US, there will be colonies of rich folks, guarded by gun tottling guards and other luxaries. But outside these colonies will be the world 20 years behind, in economic chaos and low standards of living. Hope the above scenario is only a fiction, but in any case, a lot of damage has been done to the financial engine of the world and 'freedom' of the people all round is in danger.