Question; What is the root cause of our financial dilemma? - Page 5

AzX5 · #41 09-29-2008, 05:49 PM

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Eric5273 · #42 09-30-2008, 12:03 AM

Quote:

Originally Posted by LVR

Hi all. Well I will try to answer the question posed at the outset as from where I sit, the answer seems pretty clear....

Here in Australia, when you take out a mortgage for the property, you are effectively giving a personal guarantee for the debt to the bank. If you default, the bank will step in, repo the property (and they don't care about how much they sell it for) then pursue you for the difference. Your only escape is to declare Bankruptcy or do a deal to pay off the balance over a period of time.

We also have a national credit referencing agency called Baycorp, which records all your applications for any kind of credit, together with your defaults (so don't EVER miss your phone bill) and it is checked by the lender each time you apply for a mortgage. Essentially, the onus is upon YOU the borrower to make the payments or if you cannot, you sell the property and pay off the balance somehow.

Now, this system means that you rarely get an LVR above 80% (Loan to Value Ratio or the amount the lender will contribute towards the value) with a bank, and if you didn't pay that bill and your credit is stuffed then you go to a non bank lender. These lenders have higher LVR's, looser credit restrictions, and allow you to state your own income level by self certification. BUT!!!! They still do a credit check on you, and they also do a background picture to see if you really have the lifestyle to which you claim. The message is, you cannot obtain a mortgage without a personal guarantee.

My understanding of what has been happening in the US is, that non bank lenders have been giving mortgages to so called 'ninjas' (no income, no job or assets) and when those people default, they can just hand the keys back and walk away!!!!!!!!!!!!!!

A lot of people are blaming the 'wall street' people for their trading of equities or in real world language, packaging up these mortgages and trading them. This is nothing new or no big deal, just the scale of it is the problem.

Here in Australia you can buy what is called a 'loan book'. When your broker writes up your loan, he gets an upfront and trailing commission from the lender. That trailing commision (around 0.025%-0.04% of the total value of the loan depending on certain criteria) continues for the life of the loan. Brokers from time to time build up a portfolio of loans and sell them off. Just like real estate agents buy and sell their rent rolls. Banks will quite happily give you finance for them as they know the income is sound (what you have to be careful of though is that the commission only lasts for the life of the loan....in other words, when someone goes and re-finances or buys a new home, that loan ends).

Over a period of time the book begins to become stale and drops off in value quite markedly as the loans drift off to different lenders. So if you buy this, you have to do a lot of research about the amount of churn, the age of the book, the number of dodgy borrowers etc. When you compare the cost of financing it versus the income/management/cost of new business to maintain the value it soon becomes clear that it is a niche product only suitable to be bought and sold by those in the industry.

I was able to buy a $4 Billion loan book. Sounds impressive, but the reality is that after about 3 years that loan book would only be worth 60-70% of its original value, and the income would be unable to service the repayments after only 2 years. Even though you are only paying a factor of eg 2 times income for the book, the point of buying a diminishing asset disappears quickly. So I didn't..

For those of you wondering where all the money has gone on Wall Street, take a couple of million for the purchase of the book, chop it in half after 2 years and leverage that on a huge scale for the number of trades that have likely occurred.

Essentially, I think that the foundations of your whole mortgage industry are dangerously flawed because the borrowers are not liable for the debt. It only took the trading or 'leveraging' of this flaw to magnify the damage. If you have a flaw in something, fix it before you leverage it as you will only leverage the flaw to levels of disaster now being seen.

That product should never have been traded on the scale that it has, on such a flawed foundation..... that is the root cause of this mess IMO

Finally....

(A personal observation here)....over the years on this and other forums, I have seen enough comments about 'compensation','your rights' 'class action' etc to understand that taking responsibility for your own mistakes has largely disappeared in American Culture. I know this statement offends some of you, but ask yourself this, how many times do you read that a dealer 'should give you a new car because the gizmo broke down twice and you only got a Ford as a loaner'

As hard as it is to hear, Americans medicine will be self administered and it will probably be in the form of taking responsibilty for your own actions.

Or to put it another way, taxpayers paying for the losses incurred by financial institutions that have had taxpayers walk away from their debts on them....

Cheers

John

Good analysis, but you are seeing the problem and not the cause behind the problem. The cause of all this trouble in this country is a slipping middle class due the cost of living increasing at a much faster rate than wages over the past 30 years -- a net decrease in real wages. This trend by itself would cause our economy to go bad due to lack of consumer spending.

So in order to keep the economy moving along and keep consumer spending up, the banks have continued to loan more and more money to people and most people have continued to borrow and borrow more in order to maintain the same lifestyle that 20-30 years ago they could have maintained without borrowing a penny.

Until that issue is addressed, any "bailout" packages or economic aid packages will just postpone the inevitable, not fix the problem.

What is happening here is the end result of capitalism. The rich get richer, while everyone else gets poorer until eventually there is no more middle class. We reached this point once before back in the 1930s before FDR saved capitalism by injecting a does of socialism/wealth redistribution in the mix with things like unemployment benefits, welfare and social security. This bailout package they are discussing is exactly that -- more socialism.

I say leave it alone. Let it die, which it surely will eventually regardless of what bandaids they put on it. Why prolong the inevitable.

Quicksilver · #43 09-30-2008, 12:29 AM

Ignore it all you want but again the real answer is "The flat out morally repugnant behaviour demonstrated by those who decided to throw caution and their fellow man to the wind." If the people who did this had an ounce of moral integrity and practiced it in their business dealings we wouldn't be having this discussion.

But nobody wants to face the real truth about this issue and personally i cant blame them. The answer may be too hard to bare.

X5Flyboy · #44 09-30-2008, 12:36 AM

Finally! someone is asking the correct question! (see my thread for "my bailout solution") - Most of the problem stems from Congress - the Community Reinvestment Act actually fined banks for not making sub-prime loans and allowed mortgages to be split up across several "investment" entities until no one knew who held the "bad" loans or how much of a part of that loan was in it - Sarbanes-Oxley forces companies/banks to "write-off" non-performing assets immediately - the removal of the uptick rule allowed "shorts" to keep on shorting stocks without pause - And increasing the size of loans Freddie-mac & Fannie-Mae just pushed them both into the middle of the quicksand

it all became a "perfect storm"

Quicksilver · #45 09-30-2008, 12:53 AM

And all that happened because of dishonest immoral people who in a position of authority took advantage of the system.

X5Flyboy · #46 09-30-2008, 01:06 AM

Quote:

Originally Posted by Quicksilver

And all that happened because of dishonest immoral people who in a position of authority took advantage of the system.

Amen, Brother! But those also include those in Congress who wrote these laws

you want to "change" Washington? Give me term limits, line item veto, loss of pension & bennies if convicted of ANY federal law or major state law, massively restrict lobbying, politicians prohibited from lobby activities for 10yrs after office, also prohibited from employment by companies they came in contact with during their time in office (only exception, if they worked there before entering politics)

Quicksilver · #47 09-30-2008, 01:19 AM

Can you imaging the uproar that would cause???????

X5Flyboy · #48 09-30-2008, 01:26 AM

But that would be REAL change - not just the word "change" - 2 terms for Senate, 6 for representative - It would definitely dry up alot of lobby money

here's another one - no political donations by companies or unions - that would include "free" labor for political campaigns by both

motordavid · #49 09-30-2008, 08:54 AM

Quote:

Originally Posted by X5Flyboy

...
you want to "change" Washington? Give me term limits, line item veto, loss of pension & bennies if convicted of ANY federal law or major state law, massively restrict lobbying, politicians prohibited from lobby activities for 10yrs after office, also prohibited from employment by companies they came in contact with during their time in office (only exception, if they worked there before entering politics)

...Damn, Mark...you musta been reading my short story mind!

Maybe, finally, a list of things that could really have impact on the morass called Congress.
To a man, my geezer buds tend to agree on those kinds of points, regardless of their politics.

The prob is none of that will ever come to pass, as Congress has become entrenched in their
own methods, madness and bad habits of how they think the system does, and should run.

Wish there was a way to put those kind of items on a ballot, even for "show"...the US people are
not idiots; they would vote for those restrictions overwhelmingly. All the other "listening to my constituents"
stuff is just head patting jive to get re-elected, of which consumes about 80% of any congressman's
time and energy. Congress could really care less what "Main Street" really thinks or feels, other than their
potential re-election votes.
BR,mD

Eric5273 · #50 09-30-2008, 11:48 AM

Quote:

Originally Posted by Quicksilver

Ignore it all you want but again the real answer is "The flat out morally repugnant behaviour demonstrated by those who decided to throw caution and their fellow man to the wind." If the people who did this had an ounce of moral integrity and practiced it in their business dealings we wouldn't be having this discussion.

But nobody wants to face the real truth about this issue and personally i cant blame them. The answer may be too hard to bare.

Yes, we all know this is the cause. It's like saying that the reason the murder rate is so high in Baltimore is because people kill eachother and are not moral.

How about offering up a solution. If you were King Quicksilver of the United States with absoulute power to do whatever you want with no oversight, how would you fix this problem?

I could be wrong, but somehow I think you are going to say that the problem is "individual responsiblity" -- something politicians say when they don't want to deal with a problem.

As much as people don't like to admit it, the real world is just a more complicated version of the old video game "Sim City". Everything the government does to oversee the country has an effect, some good, and some bad. This greed that has developed in our society is not a random happening. It is a result of our system for decades, and it may have no quick fix. It is a result of kids growing up in a world where money is the most important thing and people are judged based on what they have and not who they are or what they do. It is the essence of capitalism.

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