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Posted by Chip on July 9, 2008, 4:06 pm
Dave Dodson wrote:
>> There is no "magic" ratio of mortgage, home insurance, and property
>> tax payments to income above which a delinquency is impossible -- the
>> lower the better. In a free country, lenders ought to be able to make
>> riskier loans at higher interest rates and absorb the occasional
>> losses, as in the credit card industry. But why wouldn't lenders
>> gather information before handing over hundreds of thousands of
>> dollars?
>
>
> The subprime problem occurred because neither the mortgage brokers nor
> the bankers had any "skin" in the game. The brokers were lending money
> supplied by the bankers, securitized by investment bankers, and rated
> by securities rating companies. The brokers made money on every loan,
> but had no risk of loss if the loan failed. The bankers were selling
> the mortgages as soon as they were written to replenish their money
> supply. They were making money every loan they made, but were taking
> no risk, either. The investment bankers packaged the loans, obtained
> favorable ratings, and sold them to investors. They made money on
> every loan, but also had no risk of loss. The rating companies were
> paid by the investment bankers, who wanted high ratings to ease sales
> to investors, and satisfied their customers. They made money on every
> loan, but they also took no risk by overrating the packaged loans.
>
> Loan qualification rules merely were impediments to the brokers,
> bankers, investment bankers, and rating companies making more money,
> so they found ways to relax the rules and finally to eliminate them
> completely.
Thank you, that is the clearest explanation of this mess I've heard yet.
The greedheads keep pointing at each other so you can't figure out who
to blame. Greed is good until you bring the whole house down on everybody.
I wonder if this is going to end like the Savings and Loan scandal of
the Keating era (John McCain was one of his Five). Massive gov
bail-outs for the greedheads and screw the middle guy.
That affects financial planning, brother!
Chip
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