Both political parties were complicit in this fraud, but for different reasons. The party of business, the GOP wanted to create an ‘ownership’ society and thus help their buddies on Wall ST. The Dems wanted to open up housing for the ‘disadvantaged’, namely minorities and those with poor credit and no money for a dwon payment. Both parties had a vested interest in this Ponzi scheme because both parties’ constituents benefitted from Greenspan;s east credit. NO down, No doc, interest only loans were designed to scam the taxpayer by giving out loans to people who could neveither afford the house they were buying, or who would never have qualified for a loan in normal past underwriting standards.
The rebate bill which raises loan limit for Fannier and Freddie is just pouring more fuel on the fire, and the taxpayer will be left holding the bad for the huge defaults just down the road. The $ is being crushed precisely because the world is on to our scam, after all they bought a lot of the CDO’s and now they are next to worthless.
I think you are giving people in Washington too much credit.
I’m in the real estate business and I don’t see any signs that these guys had any idea what was going on. The private sector is far, far more powerful than the Feds when it all lines up for or against something.
The real estate boom was a trifecta of timing: 1. interest rates were low after 9/11, 2. stock market wasn’t going up so investors needed other places to make money, 3. the 1995 Gingrich tax reform made real estate saleable by removing the onerous requirement that all capital gains had to be reinvested within 2 years.
The entire world had fairly easy credit at the time so the US wasn’t the only one having a real estate boom. The ‘ownership society’ was a good idea but it wasn’t what caused the UK, France and Spain to drop interest rates to 3% and start seeing double digit real estate appreciation.
Wall Street got addicted to the mortgage bonds because they gave better returns than other investments on Wall Street in the years after 9/11 because a terrorist attack couldn’t stop mortgages. And Wall Street firms used some Arthur Anderson type schemes to create more investment vehicles by collateralizing each mortgage 4 to 7 times EACH.
The typical bank will lend each $1 they receive in deposits in a checking or savings account about seven times. They lend $7 for each $1 they have on hand. This has been determined to be the acceptable level of risk by the FDIC to insure the deposits. Nobody had ever tried doing this with mortgages before though.
Mortgages are a liability AND an asset to a bank/lender. They make money but they are also potentially a loss at the same time. So creating 7 different loans based on the collateral of a mortgage which is also a potential liability is not exactly a manageable risk unless the housing market never went down and defaults never rose.
A big part of the deflation in real estate right now is that fact that borrowers cannot refinance or renegotiate their adjustable loans. This was something which has historically been available since lending standards have not typically changed dramatically within a single year. But for the lender to change the terms of a mortgage, they also would have to change the terms of up to 7 CDOs where were all daisy chained on top of that mortgage. And this created a lack of flexibility which forced borrowers to be more likely to simply default. And that brought down all of the CDOs which were involved as well. And like a giant house of cards it all came down.
Derivatives were the previous version of this same problem but they didn’t involve mortgages or housing. It was a way to create incredible risk with the appearance of very little risk. If you are in the financial market, this is called fraud.
If you are in the gaming business, this is called genius. Take MegaBucks for instance. People sit at a machine and see that they can make $14,000,000 if they get all three symbols. So they mentally calculate the odds of getting those three symbols. And you see about 5 to 10 other machines in the same casino you are in playing for the same jackpot. The odds seem about as good or better than the average lottery. But in reality, you are playing against thousands of people at the same time because they are all at different locations. The likelihood that it will be YOU who wins just got decreased by the number of people who are currently playing at any exact moment. The spread between apparent gain and actual probability of gain was an MIT thesis paper which made the mathematician who came up with the idea tens of millions of dollars in royalties in the 1990s alone.
Trust me. The thought process of people who were buying and ‘investing’ in real estate in the last 7 years was not influenced by anything either political party was doing. Greenspan was the only one they listened to because he controlled the Fed rate. And greed was the factor which caused people to buy handfuls of properties just like it was greed which caused Merrill Lynch to invent billions of dollars in ‘assets’ which were really just bets on a continued real estate boom.