Todays Credit Crisis: I Want To Believe

No- I'm not talking about the iconic phrase that preceded all X Files episodes, I'm talking about the essence of what created this mortgage crisis- the desire to believe in the wisdom of home ownership no matter what.

Let's recap how this whole thing went down:

1) The government told banks that they had to give home loans to people who generously could be said to not be good loan candidates. They passed laws that if banks want to build a branch in a community, they have to give loans to that community. (community reinvestment act)

2) To make this possible, Politicians created programs like the FHA and all those friendly sounding names like Fanny and Freddy Mack to help either buy up mortgages that banks originate or help them absorb some of the risk (banks haven't traditionally given loans to people they thought could not pay them back after all)

3) In an environment where almost anyone who had a pulse but not necessarily a job could get a mortgage, demand for houses increased and it drove the housing prices higher.

4) In the euphoria and belief that housing prices could only go up- Wall St. stepped in to buy up the mortgages from banks and sell them to Hedge Funds that were looking for a quick return.

5) The Insurance companies wanted in on the action, so they started selling 'insurance policies' to protect holders of mortgages from default.

6) The willing market to buy mortgages from banks and mortgage originators as well as the 'insurance' against default- led to an environment where there was no reason to have any kind of underwriting standards. The more aggressive lenders were not going to hold onto the loans they were making, so therefore had no reason to responsibly underwrite.

7) Years ago, it was pretty clear this thing was unsustainable, some companies got out of the business or expressed concern, but then the ratings agencies, hired by and working for the insurance companies and banks stepped in to give them 'AAA' ratings. They were the best independent ratings that money could buy.

8) In the name of 'free trade'- the government stopped looking into the legitimacy of these companies and ratings for even the most basic level of truth. It didn't hurt that the banks, insurance companies and ratings agencies were giving millions and millions of dollars to these politicians.

9) The money train came to a stop when the housing market stopped going up, the ratings were found out to be a fraud and half the loans that were being made were fraudulent. Not wanting to be the last person to hold the hot potato, banks stopped lending not only to their customers but also each other.

10) New homes that were already built sat empty, driving down the housing prices further. Also- in an effort to generate cash flow the only way they knew how, some home builders actually accelerated their home building, further driving the home prices down.

11) The mortgage holders that financed 100% of the value of their home in the easy credit market the government created now owed much more on their home than they could sell it for. They either walked away or if they got in trouble with money, had to declare bankruptcy since they could no longer refinance.

I don't care how shocked and appalled Barney Frank and Nancy Pelosi appear to be in their show trials of the CEO's they bring on. They can complain about the greed of Wall St. all they want- but they sure were happy to take their campaign contributions (bribes)

It's ironic that both government interference AND indifference caused this crisis. But hey- they were just promoting the American dream right?

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