Eureka said:
...didn't the whole Fannie Mae/Freddy Mac thing start when the Clinton administration urged/forced them to make it easier for people to buy homes. Thus allowing people to finance mortgages they couldn't afford. Then they in turn sold off the bad mortgages etc etc.
Yes. You are referring to the Community Redevelopment Act, or CRA.
It's true that Congress mandated certain quotas of loans be made to minority home buyers... but despite what Sean Hannity and some of the conservative pundits like to think, this was NOT at ALL the primary cause of what's afflicting us. YES, certainly, it was a contributing factor, but not a very consuming one.
Only 1 in 10 subprime loans were made with the intent of conforming to the CRA. (This fact per Sheila Bair, the Bush appointed FDIC chairwoman, in testimony to Congress. Google Bair + CRA if you want the documented proof of this) Additionally, CRA loans have actually had a slightly LOWER foreclosure rate than did subprime loans not given out in order to meet the CRA mandate. So, was it a factor? Yes, absolutely. Was it a major factor? No.
The problem we are dealing with is EXPONENTIALLY bigger than just the CRA, and the highest volume of troubled mortgages aren't subprime, but rather they were the "innovative" Alt-A, Option ARM, and other "teaser rate" creations. These mortgages were non-conforming to Freddie/Fannie standards, and were instead underwritten by private mortgage banks such as Countrywide, IndyMac, Wamu, Wachovia, etc. These mortgages were the ones given with little documentation, or given to people in contradiction to normal bank lending standards of leveraging. These mortgages were your house flippers, your condo speculators, your modest-income folk completely overleveraging themselves in order to buy that McMansion in the suburbs. These mortgages were the ones given to the newly built suburban communities that are increasingly turning into ghost towns, driving down not only the home price of the defaulting buyer, but also the home price of all of the neighbors as well, turning entire new suburban development projects into black holes of foreclosures, defaults, and walk-aways. Not only are the homes of the irresponsible underwater, but some of these ENTIRE communities, massive multi-hundreds of millions developments, have lost critical mass and are collectively falling into failure for the developer who tried to finance them.
And don't think that this problem is just contained to mortgages... the SAME toxic lending occurred throughout the full spectrum of credit... modest income folk being given 10K gold cards on a "signature is all you need" basis... credit card companies handing out cards like Tic Tacs on college campuses... just sign and not only will you have an extra 10K line of credit to get yourself addicted to, but we'll ALSO give you a free T-shirt and portable athletic water bottle!... and retailers telling you, at checkout after reading you the price of the clothes or hardware you just bought, that they'll give you a TEN percent discount on this purchase if you sign up for the retailer's credit card, and put the purchase on the credit line they will extend you right THEN and THERE. The toxic lending also spread to commercial real estate, financing for new suburban strip mall storefronts that are now a third occupied, if that. And it went to financing toxic leveraged buyouts... the scale of this problem is HUGE.
It was a "bubble time", like the Roaring 20s... banks make money by earning interest on money lent. So, they lent out lots of money... and the lending spurred the economy, which made the lending "seem" sound, so they lent out more, and more... and the result was, as an example, the housing price bubble. It just seemed like things would just keep getting better forever, as long as you kept lending the good times kept getting better....
And I can admit from my own personal experience, I had a HUGE line of credit on a card I got as a college student. AND I must admit is was an awful powerful feeling walking around a shopping mall with the thought that if I really want something I see, its mine. Just need to swipe the card. Took the girlfriend out for dinner... oh, you want the lobster? Why of course why not! AND I think I'm in the mood for an appetizer, and lets get a GOOD bottle of wine tonight.
The extension of credit changes a human's mentality. If western humanity worked on a STRICT cash and carry basis, where you could ONLY buy things if you had the CASH IN HAND to pay for it right then and there, this crisis would never have happened. The "bubble times" human was turned into the equivalent of one of those lab rats that was in a cage with the big water dripper full of nicotine-infused water... just kept drinking and drinking.. it was SO much easier to promise to yourself to pay something off later, than it was to FIRST save, and then pay for something AFTER you had the cash in hand.
UNTIL the day came when your typical American started having problems making their payments. THAT'S when this bubble of false exuberance all came tumbling down.
All of us "westerners" here on this board I hope remember the past decade and enjoy the good memories. For a short while, we were all kings. Walking through that shopping mall with that gold card in our pocket... looking at the leather jackets, the fancy clothes, the expensive athletic shoes, the expensive steak dinner, the gourmet organic groceries, the flat screen TV with the home theater sound system... walking through that mall with the feeling that if you wanted ANYTHING you saw, it COULD be all yours with the painless ease of a simple swipe.
There are FEW humans in the history of this planet who have EVER experienced such a feeling of financial power. I hope you all enjoyed it while it lasted.
They were fun times. In the future, when you want to go shopping for that BIG flat screen TV, you'll need to FRONT the grand and a half that you have ALREADY earned and saved in order to take it home. Kind of a buzz kill, eh?.. lol
