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The Fates are kind.
by Gaianne on Sat Aug 28th, 2010 at 11:17:21 AM EST
[ Parent ]
The trick was that the implications of a NINJA loan were built into the system. I remember reading the trades at the time telling us what a blessing it was to be living in times that these new financial tools were able to give the AmericanDream to so many people down the ladder, that we were being racist and unkind to say that it was a fraud, that the mirror of spreading the wealth was spreading the risk.To not take a loan, especially after your friends had taken loans and had them re-financed several times as the notes became onerous ('promised' by several of the conn artists) or refi'd when the value of the house when up -- these conditions, nor the people who were not as financially clever or honest as you, should not be sneered at.

Back just after the dinosaurs left, loans defaulted routinely at a small rate. Adjustments were made (such as insurance for the loan payer) to mitigate against some percentage, But always within the cost of any loan is some percentage betting on default.

What the CDOs did was pre-bet that this cost could be spread about, so that looser money could be spread about. But there was a mistake made, in that too many people were cross betting. All the cards that we supposed to be supporting the other cards turned out to be reliant upon upper cards.

And thus it is called a ponzi scheme...though that tends to dilute the rank and number of people involved.

I just hate this 'holier than thou' attitude when discribing those who were buying in with offers that got them out of the economic cycle they were in.

That this was part of the disguise and repercussions of the Savings and Loan bailouts from 15 years before is a whole 'nuther tangent.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sun Aug 29th, 2010 at 11:57:06 AM EST
[ Parent ]
That was exactly the point of my reaction to Jerome's argument that subprime loan borrowers were "willing gamblers": actually, they were clueless gambler. The very definition of a bubble is a shared belief, that the asset in question (housing here, but works the same for tulip bulbs, dot-com stocks...) will keep increasing in value and that when the mortgage resets, you'll just take a fresh new one or resell the house for a profit (to buy an even nicer one).

Plus the very strong pull of the "American dream": owning one's home (the US legal system is based on the property laws; unlike Europe, tenants have nearly no rights -- I know, I've been there).

When the nice mortgage broker explains that you too can be part of that home ownership dream: this is entirely legal (would I lie to you?) and when the introduction rate expires you'll have build plenty of equity in your house and refi will be a snap, not many people could resist the "dream".

Of course, the whole system worked (for a time) because neither the broker, nor the bank, nor the big guys like Goldman were holding the bag: they found a way to offload all the risks onto someone else while keeping the profits -- the very definition of modern finance.

A good opportunity to watch again this excellent presentation "How Subprime Works". Should be required reading on ET.

by Bernard on Sun Aug 29th, 2010 at 12:43:26 PM EST
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