The problem is that too many exploding products--products that were designed from the beginning to become unaffordable--were sold around the country. Smarter, more effective regulation can help us avoid repeating that mistake.

Exactly. If I were to believe the talking heads and financial writers I might think that this whole mess is the fault of those who borrowed the money, rather than the deceptive products and practices that were used.

But one of the bigger risks of letting the banks write the current media script is that credit worthy, but risker borrowers will be unable to ever find financing.

It is not out of the realm of possibility that banks will welcome regulation that prevents them from making risky loans at the expense of actual reform of their practices and products.

BTW, nice interview on Fresh Air. I especially liked the tidbit about a class full of Harvard Law Students having trouble figuring out the rate on credit card application.

This is like the free traders that basically say the answer to ugly free trade is MORE FREE TRADE!!!! As if free trade and free speech were the same.

I am not the wonk, I don't know what regulation would be good and what would be bad.

I would accept no-regulation for one thing: bailout of the non-rich home owners AND NO BAILOUT of institutions and investors.

My fear is what we will get is bailout of institutions and investors while the individual home owners get the shaft.

How do we ensure that won't happen?

"The problem is that too many exploding products--products that were designed from the beginning to become unaffordable--were sold around the country. Smarter, more effective regulation can help us avoid repeating that mistake."

This is not quite fair. I am not sure there is any truly predatory loan. You surely have a lot of predatory lenders.

Each of those products has a place. If you know exactly what you are doing, have ready access to refi's, and you know your market. Banks don't make money on foreclosures, nobody does. The only person with a financial interest in pushing a bad loan is the originator and to some degree the intermediate lender.

The industry wants this to be a story about owner-occupied housing. But an as yet undetermined amount is investors who either mistimed their market or last access to a compliant lender. Investors losing money is not a tragedy, in some cases it is a positive good, bubbles are not good, that some investors feel the pain as it deflates some is not necessarily bad for that young couple who only want to own a home.

Certainly we could put a mechanism in place to review existing loans and find some way to get the truly predatory ones refinanced, at least for homes that are truly owner-occupied.

. But not every sub-prime loan is inherently predatory and not every investor who took one out a victim. This is particularly true for stated/stated and no doc. People borrow and lenders lend stated/stated or no-doc 100% LTV for a reason, and all the players know the score. People are willing to make a leveraged bet on real estate using other people's money and other people for a price are willing to lend them money. It is not much different than taking your credit card to the Casino. We don't bail out gamblers and there is no reason to bail out real estate speculators.

'Foreclosure' is an ugly word with ugly imagery. But it is also the formal process in which millionaires end up losing their real estate investment. How much of the recent uptick in foreclosures is really just people walking away from a no-equity investment in Phoenix? Where is the pain actually being felt? Because I can say that the anecdotal evidence to date hasn't been that compelling. Its like the Estate Tax and family farms. It becomes remarkeably hard to find real victims.

Foreclosure rates, price drops, lenders failing. Certainly measures to watch, not necessarily easy ones to understand. We are being set up for a bailout for investors. ARMs are not new, predatory lending is not new, what is new is that you can't make a flat out fortune in Las Vegas using other peoples money to buy condo units. Well tough, people missed the wave, they jumped on the gravy train just as the gravy bowl was pulled.

I was hired to take our company into a new real estate investment direction. My continued employment counted on at least one of three particular investments working out prior to next Dec 1. Returns from those investments among other things were supposed to fund my salary. Oops they fell through, one disasterously, and I laid myself off. Am I a victim? Hell no. That's real estate. We just need to make sure we understand who are the players. Because rich people losing money is only a crisis to the Opinion Page of the WSJ. Just as me losing a job is just a guy losing a job. It happens all the time but rarely makes it to crisis.

I was listening to the NPR money show and the guy was saying the sub-prime crash in general is not a big deal, and the Fed can just lower certain interest rates if it get to bad. Basically "pour more money into lousy loans."

Really annoying actually.

People are overlooking the role of Fannie Mae in this, by buying up loans they freed up money for the lenders to start a new cycle. In addition reselling loans shifted the risk from the originators to those buying the loan portfolios. Mortgage brokers and other middlemen also make money on the origination and take on no risk - why wouldn't they push mortgages on anyone who can fog a mirror.

Scandals like this can't exist without the, at least implicit, complicity of government. There seems to be some indications that governments will offer some sort of bridge loans to those in distress to help them in the near term. Those who profited the most from amoral dealings will, as usual, walk away with the goodies.

--- Policies not Politics
Daily Landscape

Poor people are too juvenile & unsophisticated to handle things like Credit. Best to prevent them from getting it so they don't make bad choices in the future.

This is like the free traders that basically say the answer to ugly free trade is MORE FREE TRADE!!!!

And I think that is pretty much true. As the WallStreet Journal noted recently, over 40 million jobs could be lost to outsourcing.

The author went on to note that when the educated elite start losing jobs, they'll rise up and be heard because, unlike the poor, they have political and economic connections to use.

For all I know, there might be a big shift in the way that we live life here in the US and, gasp, maybe we'll even adopt things going on in Venezuela.

It seems fair to me to bail out the rich, in this case, since the poor, many of them, probably got cash back on close and had a little fun. Now, the banks need their money back.

Something worth monitoring, perhaps or eventually coming to a neighborhood near you: community-based homeowner equity protection.

Example. The Syracuse Home Value Protection (HVP) program, described here, and more recently here (covering 129 properties as of Sep 2006).

nb. Yale SOM (link corrected) is a participating partner which, in this case, includes Robert Shiller (Case-Shiller index, Irrational Exuberance, housing bubble doomsayer, e.g. Built of Sand, Barrons, 26 Mar 2007).

In your case, agreed; but if 10-20% of your other neighbors -- many of whom may not be blessed with generous sisters -- experience problems similar to that of your sister and her family, you may well find yourself seeing something like this.

And even if your neighborhood appears to be stable (homeowners have been around for a while, turnover's low) most subprime loans have been used for refinancing (and MEW, that is, equity withdrawal).  That couple down the block who just returned from that marvellous Hawaii vacation may be going into foreclosure tomorrow. 

I know how to differentiate between institution, investor, and pretty much us peasants with a mortgage.

I think it's harder to differentiate between family that got a sub-prime with every good intention, now has a house, and a bad problem on their hands, with family that honestly yes took the equity out with a sub-prime and went to Hawaii, but all with the good intentions they were sold, with folks that knew ahead of time how bogus this was and intended to cheat the system.

Again, I want to make sure the market feedback goes to the institutions and the shareholders. They are the ones are capitalist society says should bear the brunt of giving out a stupid loan. My fear is that it will be all taxpayers that bear the brunt and that the institutions and investors will be made whole.

So frankly, if I understand your example, and I am not sure I do, I may agree with you, but I just am not worried (yet) about making whole too many homeowners including ones that somehow knew they were scamming the system.

It’s a bit simplistic, but the stark fact is that the subprime mortgage crisis is fundamentally about the stagnation and decline of working class wages in America over the past decade and more.
If the percentage change in wages from 1959 to 1981, when Reagan became President, had held at 5.478% for the past 26 years, average weekly earnings for private industry today would come to $53,802 in annual wages, rather than the $29,473 we now have. (These are my own calculations, based on Table B-47. Hours and earnings in private nonagricultural industries, 1959-2006 in the 2007 and 2004 Economic Reports of the President.) If American workers had been earning an extra $24,000 a year the past few years, how many people would have needed a subprime mortgage to buy a house, or would have needed to refinance their mortgage to take some equity out?

It seems fair to me to bail out the rich, in this case, since the poor, many of them, probably got cash back on close and had a little fun. Now, the banks need their money back.

Sometimes I am dumb and if so I apologize....

Are you pulling my leg?

It's been known for at least 30 years, that under neoclassical economics, as taught in graduate schools throughout the world that:

if you have a transaction between 2 parties (like taking out a subprime loan):

- you will not get the market optimal transaction if
one party is party to information another is not

There is a famous paper 'The Market for Lemons' by George Akerlof, who later won the Nobel Prize for it, which explains this quite clearly.

In addition, more recent work (the subject of another Nobel Prize) by Daniel Kahneman, Amos Tversky and Richard Thaler, shows that humans don't make fully rational, fully informed economic decisions, and they are quite easy to fool, because of built-in biases which show up again and again in lab studies.

This follows on from an observation made in the 1950s by Herbert Simon (who helped found the modern discipline of computer science, but was also a very talented economist, and another Nobel Prize winner) that human beings 'satisfice' ie they don't consider the full range of costs and options available to them, they focus on making a choice from a limited selection of options.

Milton Friedman, in his models of the economy, explicitly makes this assumption (adaptive expectations).

Subprime loans are a field rich for such 'asymmetric' negotiations and transactions. It's small surprise the borrowers lose out.

Re: average weekly earnings for private industry today would come to $53,802 in annual wages, rather than the $29,473 we now have.

This is a bit confused, isn't it? Who makes 29k PER WEEK?
Moreover median annual salary is around 40K, not 29K. (Median is more useful here thanaverages since people like Bill Gates skew the average higher).

If the lenders get paid in the process of families keeping their homes, that would be the best possible outcome.

Here's my thing: I think some of the rules that make it more difficult to get loans sometimes keep people who are willing to take the risk from getting loans they could very well service.

Personally, I used the SISA (stated/stated) loans because I choose to dedicate a higher proportion of my income to housing than they say I should. I drive a slightly less nice car and have a nicer house.

But, I guess my question is, how do we make sure that people have access to money while not causing a crisis where people lose their homes?

As I've said on this thread, somewhat inelegantly, I'm more concerned with the effects on homeowners who weren't involved in blowing the bubble -- the homeowners next door who are mortgage free or who are carrying prime 30- or 15-year mortgages.

I'm concerned with the "tragedy of the commons" issue.