Friday, September 26, 2008

Shame On Drudge

Shame on Drudge for linking to this bullshit video. Freddie and Fannie did NOT cause the real estate bubble!! The real-estate bubble was caused by over-investment in the housing market because of freakishly low interest rates ("money for nothing"), lax lending practices by aggressively competitive lenders (just ask my hubby's real estate broker friends), fancy pantsy financial products pushed by financial institutions that underpriced risk to increase their profit, and sheer speculation.

Start with this: Half of all sub-prime loans originated outside of the Community Reinvestment Act. In fact, in 2005 and 2006 -- the years everyone was wildly jumping on the sub-prime bandwagon -- non-CRA lenders were financing sub-primes at twice the rate of CRA banks. Why? Because they thought it was extremely profitable to do so, that's why. And this idiotic video would have us believe lenders were forced against their will by the CRA to make the sub-prime loans that gave them record profits and netted BILLIONS in bonuses? Excuse me while I go howl with laughter!

Remember... sub-prime loans are just high-risk loans, and as such they carry a higher interest rate (in order to counter the risk to the lender). For example, when I bought my mobile home in 1987, my loan was a sub-prime loan. I paid a double digit interest rate because all mobile home financing is considered risky... sub-prime. What happened in the past decade is that lenders simply started disregarding the risk part of the equation. The higher yield sub-prime interest loans actually became desirable.

You know those big ol' JUMBO loans people used to finance their McMansions? Those are non-conforming loans (also sub-prime). Anything over $417K was outside the purview of the CRA... independent. Absolutely nothing whatsoever to do with Freddie/Fannie. Why did banks make those jumbo loans? Because they were very fucking profitable, that's why!

Freddie and Fannie are guilty of a lot of bad things and they definitely had a role to play in this mess but it is just politically convenient bullshit to say they are the cause of the problem. And the CRA did not cause the problems, either, with their regulated low-end loans.

The painful truth is that the entire financial institution thought they were smart enough to make risk obsolete by laundering it through the secondary mortgage market with CDOs and a bunch of CDSs. They were wrong. The post-dot-com investment in housing that was inspired by low interest rates created a housing bubble that made everyone feel wealthy overnight. They were wrong. They said if the stock market was doing well, the fundamentals must be strong despite our pathetic consumer driven economy. They were wrong.

The perfect storm has now given us the perfect disaster.

Forbes has done an excellent, simple write up on who's to blame in their online Investopedia. Please read it or any other good economics site. Do not rely on a dumb ass video that does nothing to help and only misinforms the public. Misinformation is not going to help us get out of this situation.

One last point. Forbes does not mention this but the 2005 bankruptcy legislation changed bankruptcy laws so that people could not declare bankruptcy and still keep their homes (unless they had second homes... those could be kept). This was done at the behest of the credit card companies but the unintended consequence is that folks no longer have ANY incentive not to walk away from their homes once they're over their heads. Score one for the bootstrap crowd!


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