Howdy

I can guarantee that the houses in our towns were not sub-prime minority lending. Still, a large number of them sit empty, even in my neighborhood. The families defaulted and simply walked away, mailing the keys to the bank. My neighborhood has never before had foreclosures in the 40 years we have lived here (just in the past administration's term). We have never before had empty homes. Usually there is a waiting list of people who want homes and lots in our area.

I personally lost count at the people I knew that were in the market for McMansions just because some lender or developer told them that they could easily get a mortgage on a home 600+ times their income with no money down. None of them were sub-prime minorities (unless you count the female of a couple as a minority). Some did succumb to the temptation to have the big, beautiful home well before they could afford it.

It was a combination of events, from people thinking they were entitled to more and lenders willing to deliver. Deregulation meant that there were few rules on the lenders that could write these mortgages, re-sell them quickly and get their cut. Devaluation of the economy, increasing overall debt and increasing interest rates meant that real-estate values dropped below the mortgage values and people felt more comfortable walking away from a big mortgage that was not worth it.

Interestingly, the people I know that defaulted were all conservatives.

of all republican tactics, blame the brown people.

Ok, here's the deal. I'm not a finance person, but my dear elemental (mr. dcb) is only mere weeks away from an mba in finance, and he's been my translator in this issue. basically, here's what's been going on.

for many years, the housing market, and more specifically the credit part of the housing market, has been making quite a bit of money off of giving people loans. once they realized that this was a money-making proposition, they wanted to find a way to do more of it. so they created home equity loans and lines of credit to make it possible to get more money off of these loans. well, when the well of responsible borrowers went dry, they decided to issue 'sub prime' loans that were more risky. now some of these loans went to minorities (maybe even disproportionately), but ultimately they were risky because the banks knew that the people they were loaning the money to may be in default at some point in the future. but the banks were unconcerned at the time because real estate was soaring, and they thought that they would ultimately make money in the long run. when the sub prime mortgage well dried up, they offered lines of credit and loans against the home equity to those credit risky people too, again betting on the real estate market to work in their favor in the long run.

ok, now to the confusing stuff. how would the banks, and the investment houses (i.e. Lehmann, Bear Sterns) make all the money off of these loans? well, first, in the case of the banks, they would make any interest off of the loans. in the case of subprime, the money to be made would be much greater once the loans 'reset' themselves, or were no longer just interest only or when the interest rate adjusted up. the investment houses bought up these loans in bundles from the banks. the banks typically made money on those bundles because the belief was that the real estate market would continue to go up. the investment houses then broke the loans apart and resold them in the form of real estate securities to investors. they received a transaction fee for this. in some cases, the loans were broken apart again into other fund types, and again, there were transaction fees assessed at this point too. and many people got very rich off of this.

so these firms all made a butt-load of money on the backs of consumers, who are not innocent in this whole situation. the banks were the pushers to the american consumer's entitlement virus, and provided the unending credit that made it possible for so many to overextend themselves with their home purchases, and the purchases made with their lines of credit.

and that brings us to where we are now. these loans have been repackaged so many times, it's hard to know where the 'good' loans are versus the 'bad' loans in these securities that were sold to investors all over the world. the housing markets have tanked and people are literally leaving the keys in their mailboxes and walking away. and the value of the real estate is not what it was mortgaged for, so there's a problem with the investment house's balance sheets equaling out; many of them are illiquid (or some would argue insolvent) because they have all of these assets on their books that are not worth what the paper says they should be worth. hence the $700B bailout. but don't kid yourself, it's not gonna be $700B by the time this is all over. it's going to be much higher.

personally, i think if you make bad business decisions, you should lose the business. that is the cornerstone of a free market economy (which i'm not a disciple of, necessarily, but that's the argument of many repubs). so there should be no bailout, imo. we should let this turd sit in the punchbowl and deal with the depression that will surely follow. it's absolutely not the ideal situation, but ultimately, it's the only way the market will correct itself, and hopefully, those who caused this will learn their lesson.

class dismissed.