See if I got this right...

Discussion in 'Economy' started by Richard-H, Sep 25, 2008.

  1. Richard-H
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    Richard-H Gold Member

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    The mortgage companies came up with a 'bait and switch' scam whereby they would sell sub-prime adjustable rate mortgages to people who could not afford normal mortgages. Playing off the American fantasy of home ownership they scammed millions of desparately poor people into taking these loans. These people hoped against hope that something would break for them financially that would make it possible to meet their mortgage payments (like a 'RAISE' - apparently another American fantasy).

    The banks & mortgage companies planned it so that after the sub-prime 'grace' period ended, the interest rate would soar to a level that the vast majority of mortgagees would not be able to pay their mortgages and would go into default. The banks would then take ownership of te property and sell it at a much higher price than the original mortgage value. The former home owners having paid the taxes and maintenance on the properties for the first several years.

    So the 'plan' was for example: They give a $100k mortgage to the morgagee who pays the taxes & interest for the first few years. Since almost all mortgage payments go to paying the 'up front' interest this was no problem for the banks.

    Now, if they rolled up groups of say 100 of these mortgages into a debt package, knowing that statistically 50% of the mortgages would default on an average of, say 3 years, but that the market value of the properties would accrue by an average of 40% over those three years, for the 50% that defaulted the math works out to:

    50x$100k=$5mil invested.

    50x$100kx1.4=$7mil realized in 3 years

    for a net gain of $2mil in an average of 3 years.

    So the banking industry bought up these debt packages like hotcakes and then proceeded to use them as equity (collateral) for loans. The lenders of these secondary loans then used those loans, in turn, as collateral for more loans...and so an infinite chain of loans went on for years between the banks with the root equity behind these loans being these mortgage packages.

    Unfortunately for everyone, so many mortgages defaulted that there was a flood of properties on the market and instead of these properties accruing in value, they lost value. So that, if these properties lost 10% of their value the new math would be:

    50x$100kx0.9=4.5mil

    for a net loss of $0.5mil

    BUT

    the loans were taken out under the assumption of a $2mil gain, leaving the anticipated equity vs. the real equity at a net loss of $2.5mil.

    This ran so deep in the financial markets that no one trusted anyone and no body would make any loans to anyone. This froze the financial markets and led to the present crisis.

    Now, we could as I've suggested in an earlier thread, have the government pay up to 50% of the bad mortgages and recieve up to 50% of the equity in these properties, which would keep everyone in their homea and turn the real estate slump around...

    BUT

    The chain of banking loans depended upon 50% of the loans defaulting. If these loans did not default then based on $1k/month for 36 months mortgage payments on a $100k loan the math would be:

    50x$1kx36=$1.8mil
    for a net real loss of $3.2mil
    but verses the anticipated value of the loan packages:
    a net loss of $5.2mil

    Sooo...helping the mortgagees pay their mortgages would be considerably WORSE for the banking industry than doing nothing.

    This leaves the government with 3 options:

    1. Do nothing (or help the Mortgagees, but nothing else) which will cause a collapse of the financial industry and which will, in turn, lead to a collapse of the entire economy of western civilisation, which in turn, will lead to a HUMANITARIAN DISASTER BEYOND ANYTHING THAT HAS EVER OCCURRED IN HUMAN HISTORY.

    2. Give the banking system a whole lot of money, despite the fact thet they are a bunch of jackasses that based their entire financial structure on a SCAM. The tax payers will just have to hope that they get some sort of equity, bt will have to eat the difference. (ie.e the present Bush/democrat plan).

    3. Help the mortgagees and let the banking industry collapse and have the government create a new socialized banking system. (Runs against the grain of most American capitalists).

    This would make a good poll wouldn't it?

    If you have any better ideas PLEASE let the rest of the world know.
     
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  2. Zoomie1980
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    Zoomie1980 Senior Member

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    You only get half the picture. this crisis took TWO parties to make it a mess. It took greedy lenders and EQUALLY GREEDY ... AND STUPID or GAMBLING borrowers.

    These loans were very clearly laid out that they had balloons. Now these borrowers were NOT "desperately poor". The weren't wealthy but they weren't poor. They either had relatively low incomes or a history of missing loan payments. Thus they were HIGH RISK and like all HIGH RISK borrowers, banks will charge HIGHER RATES to cover the risk. That the loans had those higher risks somewhat hidden in balloons, still meant, at some time they would be at a high interest rates.

    In the United States your are expected to be RESPONSIBLE and ACCOUNTABLE for your own decisions and these borrowers have NO EXCUSE for not knowing what they were getting into. If you are too stupid to understand what you are doing....DO NOT DO IT!!!!

    The lenders were betting that the value of the collateral would simply allow them to repossess the property and sell it again at an even HIGHER price IF the buyers defaulted. IF they maintained their payments they could make money on the high interest rates.

    The only thing that could mess the deal up was a FALLING price. Since that has almost NEVER happened in the housing market since WWII, they didn't think it ever would. But it did, and thus the mess for all the reasons of credit swap deals you mentioned.

    So this crisis took two to tango. Stupid borrowers and deceptive lenders who preyed on the greed of those stupid borrowers. They are BOTH at fault. A just solution would be to make BOTH pay. The borrowers should be kicked out of their houses to the street. And the lenders should be made to suck up all their losses and lose their wealth and go out of business.

    But doing so ensures that our financial system collapses since so much of it is based on this false scheme of every rising real estate value. If that collapses foreign investors in our securities leave, en-masse, and we left in a severe DEPRESSION that would make the 1930's look like party time.
     
  3. AVG-JOE
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    AVG-JOE American Mutt Staff Member Gold Supporting Member

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    Don't be too hard on people who took on a mortgage that sucks a little now back when gas was $1.80 a gallon and all the experts were telling them that there was no end to the rise in prices, only peaks and valleys on the way up.

    Yes, buyer beware, but don't blame people on the fringe of a shit storm for getting dirty.

    -Joe
     
    Last edited: Sep 26, 2008
  4. Diuretic
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    Diuretic Permanently confused

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    In the English courts during the 18th Century the judges refused to criminalise fraud. They had to enforce the common law misdemeanour of cheating (where the public at large were liable to be cheated, say with weights) but they were of the opinion that if somone was conned in a fraud then that was their bad luck. The parliament corrected that during the 19th Century.

    So, here we are. Folks who were conned into taking a sub-prime loan and some posters want to blame the victim (although to be fair posters are also blaming the con artists).

    The people who put the bait out should be tossed in the slammer, don't blame the victims.
     
  5. editec
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    editec Mr. Forgot-it-All

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    I hasve a better idea.

    I've posted it about three or four times.

    Its basically the same thing we did in the last CREDIT DRIVEN BANKERS' DEPRESSION.

    It worked out well then and there's no reason it wouldn't work out well this time, either.

    The USA take over ALL the assets of the banks that are insolvent.

    The USA renegotiates the mortgages with the homeowners.

    The USA becomes the BANK of last resort and IT pays off the bond holders as that real estate is paid off.

    The losers are the stock holders in the banks.

    They can sue their former employers for their loses. Maybe they can get back SOME of what they lost, but hey, I don't really give a damn, because THEY let their employees screw up, not us.
     
  6. AVG-JOE
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    AVG-JOE American Mutt Staff Member Gold Supporting Member

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    Those same courts put people in debtors prison for getting behind in their loan payments, returning the assets in default to the rich nobles who made the loans - just one of the reasons we left England.

    I suppose it could be worse...

    -Joe
     
  7. AVG-JOE
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    AVG-JOE American Mutt Staff Member Gold Supporting Member

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    This is the best intervention the government can do, but it doesn't consolidate the banking industry into the hands of the few who are making a grab for it, so it is not making it through the lobby filter in congress.

    We should insist that nothing be done until the next administration and congress are in session next January. The clowns working on it have no accountability to the consumers and taxpayers.

    -Joe
     
  8. busara
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    busara wanasiasa wapumbava

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    im sorry, but if you cant afford an extra $25 a week in gas and slightly higher electricity and food prices, you took out too big of a mortgage. assuming you wont have any bigger expenses is stupid
     
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  9. Paulie
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    Paulie Platinum Member

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    I don't think gas prices are the cause. It's an extra hundred or two a month, no big deal. Not a make or break situation. If an extra 200 a month ruins you financially, you were too much in debt as it is and you had no business buying a house. How about all the EXTRA debt people have taken on? All the credit cards? The expensive vehicle they really didn't need? Building no savings because spending money on unnecessary CRAP was too much fun?

    There's way more than gas prices involved here. There are too many stupid people in this country. That's the main problem. When people learn the value of a Dollar again, we'll get somewhere.
     
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  10. busara
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    busara wanasiasa wapumbava

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    pssh, thats easy. just look at the menu at mcdonalds. thats how much a dollar is worth
     
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    Last edited: Sep 26, 2008

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