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Thread: SubPrime Mortgage Explaination

  1. #1
    Senior Member Raymond Little's Avatar
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    Default SubPrime Mortgage Explaination

    http://research.stlouisfed.org/publi...mPennCross.pdf

    This is a very lengthy read but worth the effort if you really want to understand why we are in our current economic mess.


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    Senior Member shootncast's Avatar
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    Wouldn't that be " Rocket Scientist"?

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    Senior Member BrianW's Avatar
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    Since the saying is usually "this ain't rocket science or brain surgery" some w/ offbeat sense humor are referring to the "obvious" as "rocket surgery" now.
    "It's not that government is inherently stupid, although that's a debatable question."
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    Senior Member Uncle Bill's Avatar
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    This is as I understand it. UB




    The financial crisis explained in simple terms:


    Heidi is the proprietor of a bar in Berlin. In order to increase sales,
    She decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
    Word gets around and as a result increasing numbers of customers flood into Heidi's bar.
    Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.
    A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.
    He sees no reason for undue concern since he has the debts of the alcoholics as collateral.
    At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.
    One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.
    However they cannot pay back the debts.
    Heidi cannot fulfil her loan obligations and claims bankruptcy.
    DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %.
    The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.
    The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.
    The funds required for this purpose are obtained by a tax levied on the non drinkers.


    Finally an explanation I understand .....
    When the one you love becomes a memory, that memory becomes a treasure.

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    Genius !!!!

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    Senior Member Julie R.'s Avatar
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    That article was good, but it left out or glossed over several key components that came together to seed the perfect storm, including names we now see in the Obomo Admin.

    That brilliant social architect Jimmy Carter laid the groundwork with his Community Reinvestment Act (CRA) from the late 70s, but it was a little-used tool until Clinton and his Fannie Mae/Freddie Mac cronies beefed it up.

    excerpts from the New York Times, 1993
    http://query.nytimes.com/gst/fullpag...=&pagewanted=1

    http://www.freerepublic.com/fo...f-news/2095055/posts
    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 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.''
    note: Raines departed Fannie Mae after authorizing the largest bonuses in its history and under a cloud of millions unaccounted for; he was Obomo's chief financial advisor during the campaign and architect of some of Obomo's wealth redistribution projects.

    Fannie Mae, the nation's biggest underwriter of home mortgages, was put under increased pressure from the Clinton Administration to expand mortgage loans among low and moderate income people (loans the banks would not make on their own).

    Then, **imagine this** Obomo's boy Eric Holder, then U.S. Attorney, settled a landmark case in 1994 in which two D.C. area banks were accused of bias in not serving certain (blighted) areas of the District. Chevy Chase S&L denied the charges of bias, but did agree to make $140 million in subsidized or below-marketrate mortgage loans in to neighborhoods it was accused of discriminating against.

    Holder bragged that the settlement was unique because cash was funnelled directly to the community rather than to the government. The banks were also forced to fill quotas and open branches in underserved areas (ghettos) and all the employees had to take 'sensitivity training'.

    (National Review, 1993)
    Assault on the mortgage lenders continued in the name of racial justice as the Clintonites wanted the power to decide who got a home of his own with imposition of regulations on banks to make loans even if applicants are not creditworthy:

    http://findarticles.com/p/articles/m...s_/ai_14779796

    http://www.freerepublic.com/fo...f-news/2088728/posts
    QUIETLY, behind the scenes, the Clinton Administration is preparing for the biggest regulatory crackdown of recent years. Attorney General Janet Reno is linking up with banking regulators and with HUD Secretary Henry Cisneros to end the supposed epidemic of discrimination against minorities in making home loans. The implications for society at large are ominous.

    Here, as in affirmative-action efforts in hiring, college admissions, and the drawing of voting districts, the Washington establishment is obsessed with "disparate impact," which it equates with racism. In the mortgage-lending area, there is ample evidence of disparate impact to feed this obsession. Data collected by the Federal Government revealed that in 1992, while 16 per cent of white applicants for mortgage loans were rejected, 36 per cent of black applicants were rejected.

    But does disparate impact indicate racism? According to Lawrence Lindsey, the Federal Reserve governor who oversaw the collection of mortgage lending data, even the celebrated Boston Fed study that inspired this crusade found that factors other than race--such as one's credit record and whether one has sufficient income to meet the payments--are enough to account for nearly all the difference in rejection rates.

    In short, the banking and housing crisis was created by the Democrats' grandiose plans to share the wealth even with those unable and unvilling to repay loans.

    Note: Much of this is from an article I saved from the Richmond Times Dispatch Jan. 18th about banking deregulation. It was written by Walter Williams, a college professor who also happens to be black. I can't find it on the Times-Dispatch website or I'd link to it.

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    Senior Member YardleyLabs's Avatar
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    Unfortunately, I think you're suffering from ideological myopia.

    The overwhelming bulk of all mortgages outstanding today have been issued since 2001. Not only that, the bulk of mortgages outstanding today are the resulting of refinancing. Similarly, the overwhelming bulk of subprime mortgages outstanding today resulted from refinancings. While the proportion of mortgages classified as subprime has been growing as a percentage of all mortgages, that growth happened beginning in 2002/2003, not in the 90's as a resulted of the CRA.

    In fact, delinquency rates declined through the 90's before beginning to grow following the Internet bubble collapse and the 2001/2002 recession. Delinquency then declined again to relatively low historic levels until late 2005/early 2006 as interest rates finally began to rise and housing price growth plummeted. As recently as late 2006/early 2007, the Mortgage bankers Association was predicting a rapid turnaround in the housing market and a return to higher growth levels and gorwing mortgage issuances, declaring that the sligh rise in delinquencies should not threaten anything. Subprime mortgages were welcomed because they were more profitable than prime mortgages. Competition in this market remained intense and the market share held by government financing programs (HFA/VA) declined as the fianncial services industry fought to gain these borrowers.

    The mechanics of the bubble and the collapse are complex. I believe the collapse was at least largely caused by a "perfect storm" of
    • historically low interest rates,
    • an unprecendented volume of capital needing investment attributable to a foreign capital influx linked to massive growth in our current account deficit reduced regulation allowing US financial firms to dramatically increase their leverage
    • a growth in consumption among the 90% of people who lost real income during the period 2001-2006 that was financed by borrowing against inflated home values under relaxed credit standards that allowed borrowing a higher percentage of home value.
    The house of cards did not collapse because of subprime mortgages; these simply led the way much like canaries used in the mines to tell miners wehn the air is going bad. As interest rates finally began to rise in 2006, the housing market began to slow until prices actually began to decline in 2007. Delinquencies went up, but consumption fell even further since it could no longer be financed with home equity. That spiraled into increases in unemployment, reductions in real income for the majority of the population, etc., etc. The growth in delinquencies among the subprime mortgages by itself would have been manageable. What is hurting now is the growth in delinquencies among prime mortgages combined with the dramatic fall off in consumption.

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    Senior Member IowaBayDog's Avatar
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    UB,

    You missed a couple steps, Heidi sold off all that debt to someone else who re-packaged it into the bonds. She took all that profit and paid her bartenders huge incentive bonuses to keep the fluids flowing while continually selling of the debt to someone else and skimming profit off the top.

    Heidi and her bartenders are livin' large while the rest of us clean up the mess via income confiscation/socialism.
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    Senior Member Steve's Avatar
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    Quote Originally Posted by BrianW View Post
    Since the saying is usually "this ain't rocket science or brain surgery" some w/ offbeat sense humor are referring to the "obvious" as "rocket surgery" now.
    I been saying that for at least ten years.
    Kelly, Weis, Willingham, & Davies

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