What is the economic crisis really about?

9/23/2008 | Eagles6

[Eagles6]

I thought that I would pose a few questions to the sharpest knives in the drawer, Freepers, and perhaps incite some discussion by those more knowledgeable than myself and in the process enlighten us all a bit. I have been employed in the residential mortgage business for the last 6 yrs. and may have a little better grasp of what is happening than the average guy on the street, though far from an expert.

[Eagles6]

1. Where is the $700 billion going? Is the US gubmint buying sub-prime mortgages to relieve financial institutions of their burden, in which case, we the taxpayer, will have actual brick and mortar ie collateral which can then be sold?

2. I am aware that Congress, by way of the CRA, pressured/forced lending institutions to lower underwriting standards and provide mortgages to minority borrowers that ordinarily wouldn't qualify. Were these banks also forced to provide no doc loans to illegal immigrants or was there a feeding frenzy going on?

3. Who in these lending institutions were approving these loans that were overvalued and they knew couldn't be paid back? Loan officers get paid when the loan closes, they don't care if it defaults next week. I suspect that there was a fair amount of fraud involved in the no doc loans and also appraisals but someone up the food chain, in a corner office with a view approved the this crap.

4. Was the intent just to close these loans, get the fees, bundle the sub-prime garbage in bundled mortgage securities and sell to investment banks and such and to Freddie and Fannie thus passing the stinking fish down the line?

5. If the percentage of residential mortgages in default or close to it is anywhere from 2%-6% why the supposed dramatic impact on the economy?

6. Lastly, should I invest in Avon stock, speculating a run on their popular "Soap on a Rope" or should I not expect to see Raines, Gorelick, Johnson and others in prison orange?

[Hildy]

Raines, Gorelick, Johnson and others in prison orange?

Not only will you NOT see them in prison orange, you will see them in higher positions in the coming years. That's the way this thing works.

[mnehring]

One thing folks haven’t discussed is “the uptick rule”.. I think this added a lot to this in addition to the Glass-Stegall repeal.

Personally, re stocks I bought a lot of AIG Monday and diversified the rest of what I have a lot more, including foreign etfs. AIG has risen over 30% in the past two days because folks last week bet it would go under, and sold it down to about $4.00, now, with the thought of a bail out, it has been steadily climbing. The thing about the AIG panic, is part of the company is already backed up under an insurance fund that is completely separate from the investment based banking, so they already have some protection in there.

[BARLF]

I would like to see answers to your questions,at least a good discussion if anyone knows how it got to this point, I have a lot of questions,,,,,,,,,,no answers and one opinion that I'll keep to myself.

FBI investigating, will that help?

[scooby321]

I luckily got out of the Car business three years ago ( luckily)

One of the dealerships was a KIA

People who were the kind of credit, job history, and other factors banks take in account to loan a person on a car loan,

Kia buyers were mostly secondary credit buyers ( bad credit)

Some who couldn't buy a KIA scream at our salespeople that why can I buy a home and not a KIA? I was amazed at that statement.

[Son House]

invest in Avon stock,

.
Diversify, there are thousands of great buys and great companies on sale now. I’m remembering some bank fund that was making lots of gains about 4 yrs ago, there was also a real estate fund, glad I resisted following the pac

[what's up]

Was the intent just to close these loans, get the fees, bundle the sub-prime garbage in bundled mortgage securities and sell to investment banks and such and to Freddie and Fannie thus passing the stinking fish down the line?

That's the idea I get. I suspect most would have done the same thing if in the business and ordered by the Gov't to take on junk assets.

Below is an article that explains the dramatic events of last Thursday which prodded Paulson/Bernanke to move forward with their plan. Fairly scary.

NY Post: Almost Armageddon

This article doesn't discuss the additional fears also present on Thursday when the naked shorters took control of a handful of large financials, in what may been attempts to drive them to the same status as Lehman.

[Son House]

you bring up another great point, how many of these folks had car payments? A car payment means “I can’t afford this”, and “I am willing to pay full coverage insurance”, “wash” “wax” “cd’s” “ects”(put your thought here). “My eyes are too big for my wallet”

[SuperSonic]

I found this article very helpful.

Here's a Plan to Avoid a New RTC

[listenhillary]

Good place to start IMO. Long read.

http://www.freerepublic.com/focus/f-news/2084907/posts

Avon - not sure how this company stays alive.

[advance_copy]

1. Where is the $700 billion going? Is the US gubmint buying sub-prime mortgages to relieve financial institutions of their burden, in which case, we the taxpayer, will have actual brick and mortar ie collateral which can then be sold?

The $700 billion is going to those banking, insurance, and investment companies who will sell derivitives upon derivitives upon mortgage backed securities, which are basically not worth the paper they're written on. The U.S. government won't have any ownership on foreclosed real estate, only derived ownership of the amounts recovered from those assets when what's left of the mortgage is either paid or written off.

2. I am aware that Congress, by way of the CRA, pressured/forced lending institutions to lower underwriting standards and provide mortgages to minority borrowers that ordinarily wouldn't qualify. Were these banks also forced to provide no doc loans to illegal immigrants or was there a feeding frenzy going on?

Feeding frenzy, most likely. Lenders who make no doc loans knew they could sell them off in the aformentioned worthless derivitives and collect both the amount loaned along with requisite fees.

3. Who in these lending institutions were approving these loans that were overvalued and they knew couldn't be paid back? Loan officers get paid when the loan closes, they don't care if it defaults next week. I suspect that there was a fair amount of fraud involved in the no doc loans and also appraisals but someone up the food chain, in a corner office with a view approved the this crap.

Nobody was looking in the right places to catch them, so the lenders approvee the loans, they were lending someone else's money. What happened is somebody started looking at the books close enought to see what a mess it was. We didn't get into this mess overnight. It took years, even decades.

4. Was the intent just to close these loans, get the fees, bundle the sub-prime garbage in bundled mortgage securities and sell to investment banks and such and to Freddie and Fannie thus passing the stinking fish down the line?

Bingo.

5. If the percentage of residential mortgages in default or close to it is anywhere from 2%-6% why the supposed dramatic impact on the economy?

It's not so much the foreclosures as it is all the worthless paper on the books of the financial institutions, which is playing h e double-toothpicks on their stock, and their credit ratings, and their ability to raise more money from investors. Since they can't get any more money, they don't have money to lend or invest, which is pretty much the end of the line for lenders, insurance companies, investment firms, etc.

6. Lastly, should I invest in Avon stock, speculating a run on their popular "Soap on a Rope" or should I not expect to see Raines, Gorelick, Johnson and others in prison orange?

They aren't going to jail, I don't think. Besides keep your money out of the market. NOTE: These answers are provided by someone who knows absolutely nothing about finance, investing, banking, etc. But I can read the writing on the wall.

[mnehring]

People couldn’t qualify for a Kia? (actually, I’m not knocking Kia, I know successful people who drive them, they are very frugal and swear by their quality- I’ll stick w/ my BMW and H3.)

[VOA]

bump

[mnehring]

..keep your money out of the market.. No offense, but I strongly disagree, the market is where you want your money right now. Just diversify and think of all the bargain companies that are unrelated to the financial firms in trouble. MSFT has been a steal for a long time, with over $40 Billion cash on hand and no debt. There are a lot of companies like Microsoft out there who have been held down because of other stocks bringing the market down. There is a lot of money moving out of the big financial that need to go somewhere. People will be looking for stocks with strong fundamentals, like Microsoft (for example) to move money to.

Warren Buffet had a good philosophy- when people panic- Buy. When people are greedy- sell. It seems to be better than the old 'buy low, sell high' mantra..

[shadowgovernment]

History is being made now..THe USA is bankrupt and
the world is holding it's breath it will not collapse the world economy as they are holders of trillions $$ of our debt.
I do not see any way to protect assets ..except by getting out of Dollars and into a more sound currency, perhaps the loonie (canada) or swiss franc..gold perhaps but it will fall with the coming deflation.
Lets pray the bankers can inflate the dollar one more time to stave off the collapse, can congress spend us out of this mess?? they will try.

[Lloyd227]

Tip for you: "I am aware that Congress, by way of the CRA, pressured/forced lending institutions to lower underwriting standards and provide mortgages to minority borrowers that ordinarily wouldn't qualify."

Please unleash what happened here to the word "minority". The institutions were pressured/forced to lower underwriting standards to allow more borrowers to qualify.

You'll have much more success in daily discussions with co-workers on this topic and do it without offending minorities or even "friends of minorities". The truth is, people were given loans who had not the means of repaying the loans. Their ethnicity, race, gender, religion or even sexual orientation has little to do with their ability to repay the loan. Let's keep the conversation at that level please :-)

[advance_copy]

No offense taken, because you could be right. Could be wrong, too.

[FastCoyote]

[I would like to see answers to your questions,at least a good discussion if anyone knows how it got to this point, I have a lot of questions,,,,,,,,,,]

Unless the universe has just repealed the laws of economics and laws of markets, there are only too possible culprits (since free markets are by nature self correcting). That leaves first Congress, who has distorted the financial market through backing corrupt endeavors like Fannie and Freddie, throwing a wrench into lending due diligence to low income families and passing laws like Sarbannes Oaxley.

Secondly, much of this crash must trace to loose Fed policy, which caused the crash of the dollar, inflation of commodities ranging from Gold to oil to corn, and flooded the subprime lending market with free money.

This really isn't hard folks, no matter what the bureaucrats tell you.

[mnehring]

I know, but your money has to go somewhere. That is why my first statement was to diversify.. diversify as much as possible. Other than a brief big buy of AIG on Monday, I try to keep less than a couple of percent in any one stock or holding.

If it all goes under, even cash under your mattress may be useless (no, I don’t think it will all go under). Think about the S&L crisis, this is very similar.. it was a great buying opportunity.

[old curmudgeon]

This is really to everyone.

If you want a look from the outside,

http://www.freerepublic.com/focus/f-news/2088972/posts

A real lesson on what happens with insiders.

A must read