Fanny, Freddy, the banks and Insurance co's?

I know this is probably an oversimplification but anyway, I thought the major reason for all this financial trouble here and world wide was that a while back Fanny and Freddy handled all the house loans to fairly strict standards, then the banks took over and those standards went out the window and real greed took over, hence the collapse, or nearly so.

I was over a friends house the other day and Glenn thought insurance companies where the real culprits in all this. This angle has never come up either on the radio or any media that I know of so it took me by surprise; Glenn went on to say that insurance companies where the ones holding all the money and were also the ones naming the tunes that everybody was dancing to.

Without starting a war here, does anybody care to comment on truths known.

Rick

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rkj
I know this is probably an oversimplification but anyway, I thought the major reason for all this financial trouble here and world wide was that a while back Fanny and Freddy handled all the house loans to fairly strict standards, then the banks took over and those standards went out the window and real greed took over, hence the collapse, or nearly so.

I'm no financial expert, but from how I understand it, the major cause of this trouble was the real estate bubble. Lending, which used to be a lot more strict, as you say, became easier and easier. Banks used to require 20% down and verifiable income, etc, and they would only make loans they regarded as "safe." Loans became easier to get, requiring little or no money down, and so a lot of people bought houses where they previously would not have been able to. This drove up housing prices and values, so people could buy a home, let it appreciate for a few months and sell it for a huge profit. Also, because many new homeowners didn't have any down payment, they did not have as much to lose if they had to default on the loan, and that leaves banks with foreclosed properties that they don't want, but the borrowers weren't paying the bills. The housing prices should not have escalated so rapidly, but because they did, people had to take out larger and larger loans, which led to higher home "values," etc, and the cycle went on until it became obvious that the mortgage-backed securities were really worthless.

It depends on who you listen to, but the Community Reinvestment Act may or may not be partially (or largely) to blame. The act required banks to make loans in areas that they otherwise wouldn't have entered, specifically middle and low income areas that the banks had previously avoided. The banks had avoided them because they viewed the loans to those borrowers as too risky, and the CRA was intended to increase availability of credit to people who had a hard time finding it, so they could buy homes and become more invested in their communities. Some say this act essentially forced banks to relax their standards and make risky loans, and some lending practices were predatory, getting borrowers into loans they couldn't afford and would have to default on, simply to show that the bank had made enough loans in these areas, so they could get higher ratings from the government, etc.

I think that if the banks were truly forced, as some say, to make bad loans, then this obviously did not help the situation. However, I also believe that people need to be responsible for what they borrow, and when you sign a mortgage paper, it's all spelled out in black and white - what your payments will be, how long, etc. If people took out mortgages they knew they couldn't afford, then shame on both them and the bank for making the loan. Government oversight (or lack thereof) might have contributed to the problem (or kept it from getting too out of control), but at the end, the borrower has to be responsible for a loan they take out, just as the bank has to do its due diligence to ensure the loans they make are good.

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I was over a friends house the other day and Glenn thought insurance companies where the real culprits in all this. This angle has never come up either on the radio or any media that I know of so it took me by surprise; Glenn went on to say that insurance companies where the ones holding all the money and were also the ones naming the tunes that everybody was dancing to.

Without starting a war here, does anybody care to comment on truths known.

Rick

I don't know what role the insurance companies played in this mess, I'd be interested to see reasons why they were the real culprits. I'm sure they knew what was going on and didn't necessarily help prevent it, but I don't know how much of the blame they should share.

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Another part of the puzzle were all the loans with the "low introductory" 2 year low ball payment. When these loans reset, many people couldn't afford the increase in payments which contributed to many forclosures. In many cases, many unsophisticated borrowers were talked into getting loans which were way over their heads. When they asked what would happen if they couldn't afford the new payment schedule, they were told not to worry, that even if they had to sell the house in 2 years, they would still make a potload of money on the deal. No one thought that the market would implode.

The banks were in a good position as they always sold off the loans to Freddie Mac and Sallie Mae so they really didn't care, they weren't going to get stuck. Mortgage brokers couldn't wait to get people loans, everyone was making money during the runup. These loans were packaged on Wall St. Many investors/companies bought these instruments not knowing exactly what they were and when the whole thing turned turtle, well, the rest we know.

I think the insurance companies such as AIG, always big investors on Wall St. were led into these packaged instruments and didn't check them out before investing. Surprisingly, many sophisticated investors plunged into the pool along with everyone else.

alan



Edited 1 time(s). Last edit at 03/02/2009 07:45PM by alanrw.

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alanrw
Another part of the puzzle were all the loans with the "low introductory" 2 year low ball payment. When these loans reset, many people couldn't afford the increase in payments which contributed to many forclosures. In many cases, many unsophisticated borrowers were talked into getting loans which were way over their heads. When they asked what would happen if they couldn't afford the new payment schedule, they were told not to worry, that even if they had to sell the house in 2 years, they would still make a potload of money on the deal. No one thought that the market would implode.

The banks were in a good position as they always sold off the loans to Freddie Mac and Sallie Mae so they really didn't care, they weren't going to get stuck. Mortgage brokers couldn't wait to get people loans, everyone was making money during the runup. These loans were packaged on Wall St. Many investors/companies bought these instruments not knowing exactly what they were and when the whole thing turned turtle, well, the rest we know.

I think the insurance companies such as AIG, always big investors on Wall St. were led into these packaged instruments and didn't check them out before investing. Surprisingly, many sophisticated investors plunged into the pool along with everyone else.

alan

The AIG thing isn't looking too good from what I heard last night on 13, the government is going to have an up hill battle it seems. It sure seems like backing a dead horse at this point, we're thinking of bailing out... We can't afford to lose any more It really is looking pretty bleak out there.

Rick

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rkj

Quote
alanrw
Another part of the puzzle were all the loans with the "low introductory" 2 year low ball payment. When these loans reset, many people couldn't afford the increase in payments which contributed to many forclosures. In many cases, many unsophisticated borrowers were talked into getting loans which were way over their heads. When they asked what would happen if they couldn't afford the new payment schedule, they were told not to worry, that even if they had to sell the house in 2 years, they would still make a potload of money on the deal. No one thought that the market would implode.

The banks were in a good position as they always sold off the loans to Freddie Mac and Sallie Mae so they really didn't care, they weren't going to get stuck. Mortgage brokers couldn't wait to get people loans, everyone was making money during the runup. These loans were packaged on Wall St. Many investors/companies bought these instruments not knowing exactly what they were and when the whole thing turned turtle, well, the rest we know.

I think the insurance companies such as AIG, always big investors on Wall St. were led into these packaged instruments and didn't check them out before investing. Surprisingly, many sophisticated investors plunged into the pool along with everyone else.

alan

The AIG thing isn't looking too good from what I heard last night on 13, the government is going to have an up hill battle it seems. It sure seems like backing a dead horse at this point, we're thinking of bailing out... We can't afford to lose any more It really is looking pretty bleak out there.

Rick

It just doesn't seem to stop. We have Nortel; which is in bankruptcy; dishing out $40 million in bonuses to the top execs ... where is my howitzer? :X

I don't get any kind of good feeling that the Trillion dollar stimulus package is going to be any better spent than the billions before it that have gone to executive bonuses

Perhaps Obama will be the last President of the US...

Well, at least now we know how the people on the Titanic felt. I think the issue is that if we let these companies fail, the collateral damage to the everyman will be devastating. Rampant job loss which will lead to people losing their homes, families being broken up, it will be a tidal wave.

alan

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alanrw
Well, at least now we know how the people on the Titanic felt. I think the issue is that if we let these companies fail, the collateral damage to the everyman will be devastating. Rampant job loss which will lead to people losing their homes, families being broken up, it will be a tidal wave.

alan

I'm not so sure that won't happen anyway, I think the bottom is a long way down still

I fear you are correct.

alan

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alanrw
I fear you are correct.

alan

Heard a rumor today that AIG is where the congress' retirement plan is kept. Not sure if that is accurate. Maybe that is why it got so much bailout money.

Bob