banking crisis

I didn't sleep last night. No, it wasn't the mortgage thing that kept me awake but seeing a segment on CNN did make me fume a bit. Since I couldn't sleep I stayed up all night watching 5 episodes of House. Now I've watched all of the first season and a good part of the second season. Eventually I'll get caught up.

In any case, during one of the breaks between episodes I saw a few minutes of a CNN segment. They had something like 6 guests on plus the "newsperson" and the topic was how regular people were being screwed by the finance companies. You see these were people that were in danger of losing their homes because of foreclosure. I wish I could be amused by things like that--but I can't.

Now don't get me wrong--I love to place blame on government and large corporations as much as the next guy, but most of the people facing foreclosure bought more house than they could afford using special forms of mortgage in which the interest rates were artificially low. Essentially they were betting that something would happen that would allow them to make good on the loan before the piper needed paying. Because a huge number of these people were wrong, their loans went bad, and now the companies and hedge funds owning the mortgage paper are going belly-up.

Right now it seems that the media and pundits are blaming only the companies that originated the loans and the ones that ended up buying the loans after they were made. I agree that there's plenty of blame to go around, I think that ultimately the blame lies with the people that borrowed the money not the ones lending it.

Damn, I'm tired. I'm too old for this working all day after being up all night.

Of course there should have been better government regulation. I largely blame the Reagan and HW Bush administrations for that due to their deregulation of the S&L and banking industries. The entire mortgage origination business was an accident waiting to happen. Having a company make a loan then immediately turn around and sell that financial instrument creates a situation in which the loan originator has little incentive to ensure credit worthiness on the part of the borrower. The result of that is plain to see---and plenty of people have pointed to this problem as far back as a decade ago.

So you have the government allowing the mortgage origination business to run amuck, people borrowing money for mortgages that often weren't capable of paying back the loan, and companies buying up the bundled mortgages without much regard for their underlying safety. What a mess.

Another thing, these bad loans are being bandied about in the news at face value. But they are usually for private homes which have underlying value. So, for example, when they say that an institution is in hock for 100 million dollars that's what is loaned out. Should the companies repossess the homes for which the loans were made, they'd get back some of their money. At least half, I'd think, and probably more--so the situation isn't quite as bad as the headlines would indicate. Of course whether the total is 1 trillion or 500 billion there's little comfort to be found out there right now.

Example:
  • mortgage for $100,000
  • 5% down means that loan is for $95,000
  • bank can sell in depressed market for $85,000
  • bank actually only is holding the bag for $10,000 after house sells, not the $100,000 that is on the books
  • of course if a lot of the properties are repossessed, then house prices are going to DROP a lot as such a huge number of homes hit the market

I know some people are going to read this and think of examples of people who were blameless but still in trouble. The CNN program had a couple of people on like that--people who lose their jobs, reservists deployed overseas who endure lower pay than usual, cases where divorce or death enter into the picture--but most people using special financial instrument did so because they just barely were able to make payments. It's not surprising that those type of mortgages fail at much higher rates.

If none of this makes any sense blame my lack of sleep. Damn but I'm tired.

Comments

GA Girl said…
Good article:

http://www.msnbc.msn.com/id/26837854/
We have a conventional loan (fixed rate) and have money held in FDIC insured institutions and I'm still panicking. I don't know why. I feel like taking all my cash and sticking it under my mattress. I may just do that. The interest it's earning is pathetic. LOL.
utenzi said…
I know just what you mean, ETW. There's little point to having savings in a bank right now.

GG, that is a good article. It hits the points I do, plus a few more, and is much better written. I hurry to much when I write and it comes off scatterbrained. I need to slow down...
GA Girl said…
You must be eating real food again...
rosemary said…
You did a good job of expressing my frustration and anger. I am really angry about what is happening to our retirement accounts because of this mess. We were looking forward to retirement in a few years...not now.
utenzi said…
Well, when I got home from work tonight I had ham and cheese on crackers, GG. Does that count?
GA Girl said…
It will do ;}

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