04
Jul
08

Financial End Times: the Destructuring of America’s Financial System

WHAT CREATED THE SUBPRIME MONSTER

NOW CONSUMING THE WESTERN WORLD? 

The Clinton Housing Bubble : “Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search of half-millionaire status from an investment they could understand and self deceptively believe to be low risk; thank you for fueling the mother of all housing bubbles; thank you for enabling so many of us who bought second or third homes, and homes before construction began, which we then sold to someone else who dreamed of riches from owning homes long enough to sell to another fool.”  Vernon L. Smith, Economist

How Congress Helped Create the Subprime Mess  “But before our elected officials in Congress get too preachy about the lousy lending practices that led to today’s mortgage mess, first they ought to consider Congress’s own role in laying the groundwork.  The fact is, neither the expansion of the subprime market nor the proliferation of exotic interest-only or option-ARM mortgages would have been possible without federal laws passed in the 1980s.”  CNN Money 1/31/2008 

It'll eat you out of house and home, and car and...

How Did We Get Here?  The Story of the Credit Crisis  Starting in early 2000, housing prices adjusted for inflation began to increase to levels far exceeding the trends in rent and building costs, a key contributing factor to the current distress in the mortgage markets.  NERA concludes by saying that “even after the credit crisis is over, it is not clear that the financial markets will ever be the same again.”   Research Recap  2/20/09

Excerpt from:  What Free Market? – “In the name of broad social welfare policy aimed at helping everyone own a home, the federal Community Reinvestment Act (1977) forced lenders to give loans to unqualified borrowers. Meanwhile, the corrupt quasi-governmental entities of Fannie Mae and Freddie Mac, the artificially low interest rates enforced by the Fed, and the semi-official policy of bailing out institutions thought “too big to fail,” led to the situation where millions of Americans bought homes they couldn’t afford and Wall Street funneled billions of dollars into bad investments.” Boston Globe  9/28/08

 

Excerpt from The Evolution of the Subprime Mortgage Market– Federal Reserve Bank of St. Louis Review, January/February 2006, 88(1), pp. 31-56“Many factors have contributed to the growth of subprime lending. Most fundamentally, it became legal. The ability to charge high rates and fees to borrowers was not possible until the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was adopted in 1980. It preempted state interest rate caps. The Alternative Mortgage Transaction Parity Act (AMTPA) in 1982 permitted the use of variable interest rates and balloon payments.  These laws opened the door for the development of a subprime market, but subprime lending would not become a viable large-scale lending alternative until the Tax Reform Act of 1986 (TRA). “Although often referred to as the second of the two “Reagan tax cuts” (the Kemp-Roth Tax Cut of 1981 being the first), the bill was actually officially sponsored by Democrats, Richard Gephardt of Missouri in the House of Representatives and Bill Bradley of New Jersey in the Senate.”  (Wikipedia) 

 
President Ronald Reagan signs the Tax Reform Act of 1986 on the South Lawn.

THE TRA INCREASED THE DEMAND FOR MORTGAGE DEBT because it prohibited the deduction of interest on consumer loans, yet allowed interest deductions on mortgages for a primary residence as well as one additional home. This made even high-cost mortgage debt cheaper than consumer debt for many homeowners. In environments of low and declining interest rates, such as the late 1990s and early 2000s, cash-out refinancing becomes a popular mechanism for homeowners to access the value of their homes. In fact, slightly over one half of subprime loan originations have been for cash-out refinancing.”  Click here for entire document.   

 

 Housing Congress: Government Sponsored $ANCTIONED Entities Fannie Mae and Freddie Mac

 

 

 

 
 

> Timeline: Global Economy in Crisis – A new interactive timeline from CFR.org traces the current crisis to its
immediate origins in 2006, when U.S. housing prices began to fall.

 

EXposing Fnnie Mae and Freddie Mac  New York Investing meetup presents Exposing Fannie Mae and Freddie Mac Speaker: Daryl Montgomery Filmed: August 13, 2008 http://investing.meetup.com/21/http://nyinvestingmeetup.blogspot.com/