There seems to be a consensus that the credit crisis was triggered by "Joe Public" being unable to handle any more debt, culminating in his becoming delinquent in his mortgage payments. IMHO, what is truly ironic about the proposed solution to this crisis is to ask "Joe Public" to shoulder the bill for this mess. It seems to me that adding debt to Joe Public's back isn't going to solve the underlying problem, i.e., help him afford making his mortgage payments and thus furnish support for the real estate market. Won't this tend to make matters worse in the long run?
If this is the group consensus, I couldn't disagree more. I believe that the epicenter of the problem was the establishment of current administration's goal of increasing home ownership, which went from 63% to 70% at the height of the bubble. The theory behind this is that homeowners tend to be better citizens. Mortgage companies now had the blessing of the government to finance the All American Dream of home ownership for everyone.
Lenders, who were armed with easy subprime money made no down payment loans to virtually anyone. The only qualification for obtaining a conventional mortgage was the buyer's ability to fog up a mirror.
Most of the people who were persuaded to take this easy financing could have not even afforded to pay market rent on the homes they purchased. Many had lousy credit. Also, many investors purchased homes for rentals with no risk, other than the possibility of losing their good credit if they defaulted. We are seeing many of these defaults at the current time.
Mortgage lenders, credit rating agencies, real estate agents, appraisers, derivative issuers were all part of the problem. They eagerly jumped on the band wagon for quick and easy riches.
Risky paper on these subprime loans were tranched and sold as CDOs (collateralized debt obligations) around the world to unsuspecting investors. Credit rating agencies and lenders had a conflict of interest as these agencies rated these CDOs a higher rating than what they should have been., only to keep their business. A major credit crisis erupted when these ratings had to be lowered.
Whether anyone wants to admit it or not, Joe Public was set up for failure when they took on this real estate at hugely inflated prices. After the "teaser rate" period on these loans expired, the payments went sky high. Joe could no longer afford to make these payments his home went into foreclosure.
Sure, some of those who bought the homes at ridiculously high prices knew what they were getting into and were only gaming the system. They figured they could get cheap or free rent for a couple of years and they just walk away.
The current administration was not in touch with reality when they decided that anyone could own a home. Many of these buyers had less than good credit. Lenders even had "stated income" loans where income was not even verified.
Now, we taxpayers are being asked to foot the bill for the excesses of incompetent and greedy CEOs who made millions in salaries and bonuses while they were swept up in the euphoria of ever increasing housing prices. IMHO, the whole housing bubble was a case of collective psychosis.
While prices were rapidly rising, people kept buying the homes thinking that prices would go up for ever. Lenders kept granting the easy mortgages and now we have the worst financial crisis since the Great Depression. This time it is different. There is more to fear than fear itself.
.
How much more will we be paying
