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Oh, it certainly has prevented multiple housing bubbles.

But then banks stopped holding most of the mortgages they originated and in many sectors non-bank lenders became the dominate lenders.

In the main areas of the housing bubble, the presumption was that the housing prices were only going to go higher, so if you found you could not afford a payment, you could always borrow against the capital gain in the interim, or if you found that you could not afford the mortgage entirely, you could always sell out again at a profit.

Now, why were the lenders lending when surely they should have realized that the presumption is nonsense: that when the house price was so far out of line with rental prices that house prices were almost certain to experience a downward correction?

Because they were not expecting to hold the mortgage long term. With CDO's, they bundled the mortages into a stream of repayments, and sold off positions in line to get the money used for repayments. If not enough CDO's attracted an investment grade rating, they were put into a pile and positions in line to get their earnings were sold off.

Since the mortgage originators were not holding the mortgage long term, but rather making their money as income to create the loans, they started acting like shonky used car salesmen.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Aug 24th, 2010 at 09:16:36 PM EST
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