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How Government Pushed Subprime

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June 10, 2008 – Comments (6)

Wanna know who else had a lot to gain by pushing lousy subprime loans?

The federal government. Dems got to pretend they were "helping" people by pushing those who couldn't afford it to buy home. Republicans got to feel like they were creating an "ownership society." Fannie and Freddie got to whip up their bogus "revenues" and "earnings"  by pretending all those loans were better than they turned out to be.

In the end, as always, by pushing political agendas instead of encouraging healthy markets, they just ended up helping with a historical abberation that is putting the entire world economy at risk.

Way to go, politicians. Now you want government intervention to save the day again?

6 Comments – Post Your Own

#1) On June 10, 2008 at 10:22 PM, TDRH (99.68) wrote:

I seem to remember Greenspan saying he could not understand why anyone would want a fixed rate loan?  Maybe it was my imagination.

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#2) On June 10, 2008 at 11:08 PM, madcowmonkey (< 20) wrote:

Someday and I mean years down the road, something will come up that shows how corrupt the loans that have been pushed in the last couple of years really are. I don't know what it is and don't think I will ever get a whiff of the culprits, but there will be a similar scenario as the JFK assassination and its details that will be spilled out to a generation that doesn't seem to give a second thought about it since it was in the past. It will most likely be over the history channel and it will be done in black and white. Unlike all the pretty little pictures that we see on the tele for the news shows. 

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#3) On June 11, 2008 at 12:03 AM, EScroogeJr (< 20) wrote:

What these Dems didn't tell you is that subprime borrowers can't afford a house becase of the cost of compliance with building regulations pushed through by the Dems. Disable the market that stands ready to provide affordable housing for everyone, then offer "help" to the marginal buyers who are willing to set prices still higher. Spare me from such helpers, and I'll handle the enemies on my own.

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#4) On June 11, 2008 at 2:23 AM, MakeItSeven (32.51) wrote:

You guys should live in Congo.  The government there hardly does anything at all.  Any old airplanes can be used to carry passengers, for example.  There are no regulations so flying is very cheap and affordable.  The whole country has about 400km of paved road, all on one street.  It will surely make you happy :).

Anyway, the subprime problem was a matter of free market running amok. On hindsight:

Allen Fishbein, who was Apgar's adviser at HUD and is now at the Consumer Federation of America, said the agency failed to use its regulatory power by refusing to credit Fannie and Freddie for loans that were "contrary to good lending practices."

So the problem is that the agency failed to apply appropriate regulation (maybe because too many morons were jumping up and down hollering for less government regulation ?), giving all these "job-creating" corporates a chance to create and pass these profit-making subprime loans around.  Only a small portion of them was bought by the government agencies so it's a red herring to blame them for a problem they did not create and were only  minor accomplices because they allowed themselves to be taken advantage of by the unregulated lenders.  Their role was much smaller than the foreign banks which bought these securities:

But because Fannie and Freddie were buying mortgage-backed securities rather than the actual subprime loans, their involvement came too late to require stiffer standards from lenders.

Fostek said the agency had no practical way to comb through the tens of millions of individual loans contained in the subprime securities.

Fannie and Freddie spokespeople say their partners had agreed not to sell them loans with several prohibited characteristics, including credit insurance, excessively high costs and prepayment penalties that lasted longer than three years.

Anyway, if you remember, the housing market crashed further last year after there were no more investors for the non-conforming loans, i.e. those which were truly toxic and were bought by investors, not government agencies. 

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#5) On June 11, 2008 at 8:27 AM, EScroogeJr (< 20) wrote:

MakeItSeven,

a better example is the former Soviet Union. No regulations exist there (technically, they have quite a few, but in practice, you just pay a bribe), and their economy develops very dynamically. By the way, they've got a real ownership society. When you hear that the US's 67% rate of homedebtorship  is the highest in the world or among the highest, you know it's a lie.

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#6) On June 11, 2008 at 9:29 AM, bellard (99.34) wrote:

Hi Bent;

In my blog on housing, I also showed how the US pushed us into this current housing bubble, and now depression. This is my reason for the US setting up a trust, to buying distressed housing related assets, and holding for 5-10 years. The US will actually make money on this. Below are the 2 paragraphs on the US's involvment is the housing bubble:

 "I started to analyze this crazy home financing system. My theory is fairly simple. To much liquidity chasing an ever shrinking yield. After the US depression in 2001-2002 the federal bank lower the funds rate to 1% and kept it there. Wealthy investors were stumped; With short and long term risk free yields a pathetic low level - cash was getting very hard to invest. Investors were still hurt from the stock market crash, so these investor would not put there cash in equity markets. Then the US gave a large tax break to these investors, giving them even more cash per year to handle - what to do with all this money?????

The combination of historic low yields, fear of equities, and a poorly targeted tax cut; created a HUGE increase in  demand for stable return or yield on all this cash. Can you say SIV? Where you have demand - supply will not be far behind. The larger banks and investment house increased the creations of CMO, CDO's that satisfy the large increase in demand for yield. 5-6% yield will do just fine in this now low yield environment. To satisfy this large uptick in demand, lending standard had to fall - there is no other way to meet this new demand. No doc, negative amort., sub-prime, teaser rates loans all became common place - and much to the glee of my box flipping buddies back at the PF Chang bar in Vegas....."

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