A Primer on the 2007-2009 Financial Mess

Flopping Aces ^ | 01-03-10 | Gary Kukis

[Starman417]

1.    Politicians had policies which supported bad lending practices.  They believed that not enough loans were being made to minority groups, so they expanded the power and scope of the Community Reinvestment Act, which was designed to get more minorities to buy homes.

2.    There was the problem of minority incomes not being high enough and their credit not being good enough to get home loans.

3.    FNMA and FHLMC are quasi-government institutions (now, fully government institutions) which make the rules for buying mortgages, as mortgage companies do not hold their mortgages; they sell them on the secondary mortgage market, and use that money to make new loans.  In the past, FNMA and FHLMC had strict loan requirements, so that people who met those requirements were highly unlikely to default on a mortgage loan.

4.    At first, some lending institutions did not go along with these practices.

5.    These lending institutions were excoriated by activist groups (like ACORN).  These groups even demonstrated out in front of the private homes of various bank presidents, scaring their families.

6.    At the same time, there was the threat that the government would no longer buy their loans.  Mortgage companies function by making loans, not by holding loans, so this would destroy any mortgage company.

7.    Lending institutions which made a lot of minority loans, taking advantage of the new relaxed standards of FNMA and FHLMC, were rewarded.

8.    All of a sudden, millions of people who previously could not buy a home were now qualified.  This flooded the market with millions of new buyers, who did not have to qualify in terms of income and credit (strong indicators of loan-worthiness).

9.    This flood of new buyers drove housing prices up, which is simple supply and demand economics.  This is the great housing bubble of the early and mid-2000's where homes increased in value by as much as 100% or more in some communities.

[FrankR]

[TheBigIf]

Of course what caused the financial mess of 2007-2009 could be summed up in one word…..

FASCISM

Instead of a free market (as was intended by our Founders) we had a market that was intertwined with government and intertwined with political agendas. We even had ‘brown shirts’ though at this time they were called ‘ACORN’. This created trillions of dollars in bad loans that were being artificially propped up by even more political agendas. We have agencies like Freddie and Fannie which were poisoning the market that were being run by political cronies.

[Talf]

the problem was,

2005-2007 era, Bush pushed interest rates to zero,
triggering all kinds of problems

[TwelveOfTwenty]

What about job loss? The main reason many of of these loans went bad is because people lost their jobs and couldn't pay their mortgages in the first place.

Granted, property values were over inflated and would have dropped. However, if so many jobs weren't lost, the mortgages had been paid, and so many houses weren't in foreclosure, the property values wouldn't have dropped as badly as they did.