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What has really caused the current financial crisis?

The causes of this problem were evident years ago and were argued about endlessly on Free Republic on the old "Is There Really a Housing Bubble" threads.

It was not just people in "redline" areas that were getting loans they could not afford to repay. There were FReepers right here on Free Republic tripping over each other to pay $500,000 for $250,000 houses with gimmick loan because they all believed that those houses would now be worth $750,000.

On those threads, most people argued that Housing Trees Grow to the Sky and that the Bubble price of house "reflected what the market was willing to pay" while a few other pointed out that when people were putting no money down and getting gimmick loans on terms they could never afford to repay, the "market" was not really "paying" anything.

I predicted this mess on Free Republic back in 2005.

49 posted on Wednesday, June 22, 2005 2:28:10 PM by Polybius

35 posted on Wednesday, June 22, 2005 12:17:19 PM by Polybius

Some now want to blame the predictable crash and burn on a Carter era law that worked just fine throughout the 1980's and most of the 1990's.

That explanation is too convenient an answer. Low income people were not snapping up $800,000 condos on Miami Beach or $800,000 McMansions as fast as they could be built.

The law says you cannot turn down somebody for a loan because of race, creed or color but nowhere does the law say you can turn down somebody for a loan because of the fast that they can't possibly repay what you are loaning.

What happened was a scam, a con game, a swindle.

Specifically, it was a classic Pigeon Drop " in which a mark or 'pigeon' is convinced to give up a sum of money in order to secure the rights to a larger sum of money, or more valuable object. In reality the scammers make off with the money and the mark is left with nothing."

The "pigeon" of this scam was the mutual fund manager of your own 401K. Therefore, you, by proxy, were the pigeon.

The illegal aliens, the deadbeats without jobs or very low paying jobs or the middle class guy with a middle class job borrowing three times more than he could afford to repay were merely the tools of the scam.

The mortgage mess was created by loan brokers who were not lending their own money. They were just creating phony Pigeon Drop mortgages to sell to gullible investors. Let's be clear here. That "gullible investor" was NOT the house "buyer". It was a mutual fund manager in maybe your own 401K or a foreign investor wanting to invest in the U.S.

At the time, the stock market was not red hot like it was during the Tech Bubble and interest rates on CD's were pretty low.

However, Americans were lining up for big mortgages that they promised to repay at a good interest rate after a few years at an introductory "teaser" rate.

As a long term investment, buying those mortgage loans seemed a pretty good idea and Wall Street's customers wanted to buy them up.

So, loan brokers would write up mortgages, they would be bundled up in financial instruments and would them be sold off to your 401K manager or to that foreign investor.

Every time that happened, the loan broker would get a good commission.

Life was good for a loan broker.

There was one problem, however. Although there was a high demand for that product and investor wanted to buy more and more of those mortgage loans, the supply of creditworthy borrowers was running out.

What to do?

Simple.

Just sign up borrowers without a snowball's chance in hell of repaying the loans. Mix those loans up with better loans in a package and they will still buy them up like hot cakes on Wall Street.

So, the loan brokers started creating mortgages by getting anybody, ANYBODY with a pulse (and even some dead people without pulses, as investigators discovered) to get their names on mortgages. The worthless mortgages were then sold to eager Wall Street investors, maybe the manager of your own 401K.

As the demand for these "great investments" grew, illegal aliens, native born Americans without jobs or good credit, people with good credit wanting to borrow three times what they could actually repay to buy a house at three times the price a real market could actually bear and even dead people had their names put on these Pigeon Drop mortgages.

And Wall Street's customers just kept buying that worthless paper up.

For the loan brokers, it was just like writing a commission check to themselves, having a drunk downtown sign it, taking the check to your 401K manager than then having your 401K manager give him you 401K money in exchange for that check.

That is why loan brokers were getting filthy rich.

Every time such a worthless Pigeon Drop mortgage was sold on Wall Street to a 401K mutual fund manager ....KA-CHING..... the loan brokers got richer with commissions.

The loan brokers who rounded up illegals and dead people's names to put on the dotted line for "loans" they could never hope to repay knew exactly what they were doing: They was swindling YOUR mutual fund manager out of YOUR money and they knew it.

How's your 401K doing lately?

The mutual fund managers and investors around the world, plus the legions of Freepers who used to argue that there was no such thing as the Housing Bubble all swallowed the loan broker's Pigeon Drop swindle hook, line and sinker.

The loan brokers who left the game early got filthy rich. The ones who stayed in the game too long are now in deep kimchee because the "pigeons" wised up and are no longer buying their worthless product.

That financial blood has already been spilled and, through the stock market, is now affecting even those of us who predicted that the behavior of the last several years was lunacy.

What about the future?

How about getting back to that good ole common sense that required buyers to put down a meaningful down payment, that required that interest PLUS principal be paid each month and that required buyers to ..... GASP!! ..... OH! THE HUMANITY!!! ...... to prove that they had the income they claimed to qualify for the loan.