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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: combjelly who wrote (435232)	11/17/2008 11:20:07 AM
From: i-node	Respond to of 1573683

>> There is no way that is a stable system. I don't disagree that it is not ideal and that some tweaking of the system is called for. But it would never have come to this had lenders not had unqualified borrowers shoved down their throats. In any market a confidence crisis will most assuredly cause problems and when it happens you get a fire sale. This is not the first time we've seen this kind of thing. >> This is a lot bigger than those mortgages. It certainly is; that's the nature of leverage. But that doesn't change the fact that "those mortgages" are what caused the system to collapse. There are ALWAYS people who are at risk in these situations. Even if you go back 30 years, where PMI was everyone's solution to inadequate equity, we had a "PMI crisis" where underwriters were going broke right and left. Luckily, it didn't play out to become a huge crisis because the extent of reliance on PMI was far less due to more rational lending requirements. But had it reached a tipping point, you could have seen exactly the same crisis then as now. As a Texan, I'm sure you remember the I30 Corridor which was a microcosm of the current problem. I certainly do; I had many clients who were neck deep in it. You had 10,000 dwelling units built or partially built, rotting along I30 solely because of inadequate equity in the projects (this inadequate equity was created in a different way, by "flips" rather than by imposition). The problem spread to Dallas, and surely, you'll recall the blight on Houston as all of Texas was sucked in, and eventually, a nationwide downturn in real estate values. At that time the only thing that saved us from a similar collapse was what? Reasonable lending requirements. The problem can be solved permanently by just eliminating mortgages altogether. You buy a house when you can pay cash. There is always a tradeoff between terms and risk, but harsh lending requirements have collateral consequences to the economy. If you require all mortgages to be paid off in 5 years, you'll eliminate almost any chance of a recurrence, yet there will still be a small risk -- but what does this do to economic growth? If you eliminate balloons and variable rates, you eliminate still more risk. In retrospect we can see that CDS introduced too much leverage into the system so that there is no fail-safe. So, you have to fix that (which can easily be done). But most importantly you have to quit selling homes to people who cannot afford them.